CPR.L Regulatory News (CPR)

Carpetright plc

Preliminary Results Announcement for the 52 weeks ended 28 April 2012

Carpetright plc, Europe's leading specialist and floor covering retailer, today announces its preliminary results for the 52 weeks to 28 April 2012.

Headlines

Group

UK

The Rest of Europe

1. 'Underlying' excludes exceptional items

Lord Harris, Chairman commented :

"In my statement last year I said I expected the coming year would be challenging, with an extended period of economic uncertainty and fragile consumer confidence, and this proved to be the case. As a result, the Group faced difficult trading conditions leading to a reduction in sales volume, but we remain profitable and continue to generate strong operating cash flows."

Darren Shapland, Chief Executive commented:

"I am excited to have joined Carpetright as its Chief Executive. Whilst it has been seven years since I was previously in an executive role here, Carpetright is a business I know well. Notwithstanding the on-going challenges of the difficult consumer environment, I have been encouraged by what I have seen so far in the six weeks since becoming Chief Executive."

Outlook

Looking forward, fragile consumer confidence continues to produce a weak and volatile floor coverings market. We are encouraged to see a positive impact from the self-help actions taken during the year, whilst recognising within our plans that economic conditions will remain difficult. The Group is well positioned to deliver future profitable sales growth once consumer demand improves.

For further enquiries please contact:

Carpetright plc

Darren Shapland, Chief Executive

Neil Page, Group Finance Director

Tel: 01708 802000

Citigate Dewe Rogerson

Kevin Smith / Lindsay Noton

Tel: 020 7638 9571

There will be a presentation today at 9.00am to analysts and investors at Deutsche Bank AG London, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.

A "listen only" dial in facility will also be available: The dial in number is +44 (0) 1452 560 297 with the passcode 93776594#

A copy of this trading statement will be available on our website www.carpetright.plc.uk today from 7.00am

Notes

1. All sales figures are quoted after deducting VAT.

2. Underlying' excludes exceptional items and related tax.

3. Like-for-like sales calculated as this year's net sales divided by last year's net sales for all stores that are at least 12 months old at the beginning of our financial year. Stores closed during the year are excluded from both years. No account is taken of changes to store size or introduction of third party concessions. Sales from insurance and house building contracts are supplied through the stores and included in their figures.

4. Certain statements in this report are forward looking. Although the Group believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements. We undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

Business Review

Our business in the UK has been operating in a very difficult market, but has remained profitable with underlying operating profits down 84.3% to £2.8m. We were encouraged by a return to growth in like-for-like sales in the second half of the financial year, an improving gross margin and the results of our continuous programme of cost reduction.

In this environment, customers are looking harder than ever for value before making their purchasing decisions. Based on our experience, we are adapting our ranges and promotional activity to continue to offer the best prices, whilst simultaneously working with our suppliers to reduce the level of margin investment.

The underlying operating profits in the Rest of Europe have increased by 52.9% to £5.2m. The Netherlands and Belgium businesses are continuing to gain market share as competitors struggle in the current economic conditions. In this climate our focus has been similar to the UK business as we look to improve our range, operational efficiency and reduce costs. As part of this we took the decision to consolidate our European Central Support Office functions into the Netherlands and this will deliver a full year saving of £0.5m per annum.

The previously announced actions taken in our business in the Republic of Ireland delivered an improvement in underlying performance. The product range continues to be refined and adapted to align it more closely to the local market, and promotional campaigns have also been restructured. It is encouraging to report three consecutive quarters of like-for-like growth and this, combined with actions taken on reducing costs, has halved the losses over the last 12 months.

In common with many other businesses, we consider it appropriate to reduce our debt requirements in an uncertain economic environment with tighter credit conditions. In addition to the business continuing to create strong operating cash flows, we have completed the sale and leaseback of nine freehold properties from which we trade. Of these, four were located in the UK, four in Belgium and one in the Netherlands. The combined net proceeds were £32.0m, realising a profit on disposal of £14.5m. This was a significant factor in the reduction of the net debt during the year by £46.6m to £19.1m (2011: £65.7m).

Our Strategy

The Group remains committed to delivering long term sustainable growth in earnings per share and cash flow through the following five strategies:

1. Improving and developing our flooring product ranges and services.

2. Developing our bed proposition.

3. Managing and investing in our store portfolio.

4. Reaching more customers through additional channels.

5. Ongoing focus on cost control and cash management.

1. Improving and developing our flooring product ranges and services

We believe the foundations of Carpetright's success rests on the provision of market leading product choice which offers great value, backed by excellent customer service. As well as our experience over many years, this view is supported by externally conducted market research which indicates that Carpetright benefits from both strong brand recognition and a reputation for being the 'first choice' for fitted carpet.

In the UK, the roll out of our new laminate offering has continued and, as at the end of April 2012, this was available in 185 stores. We expect this will provide an extra area of sales growth, supported by the strength of our value and service proposition.

To increase our understanding and to monitor performance against our key customer objectives, we introduced a mystery shopper programme during the first half of the year. Initial results have enabled us to identify areas of service which we can improve and will deliver a better sales performance. These are being addressed through a coaching and development programme. As we enter the new financial year, we have also increased the sales related incentives which enable the store teams to gain a higher reward on delivering great service.

In the Rest of Europe, we continued to introduce new products, and adapted our promotional offer to suit consumer demand. Our growth in laminate sales, a product area where we have had a low market share historically, has been encouraging. This has been achieved through the introduction of a comprehensive range, with a competitive offer supported by our high service standards.

2. Developing our bed proposition

Beds provide an important complementary revenue stream to our core floor coverings business. We have developed and expanded the bed business during the year, and at the end of April 2012 our bed offer 'Sleepright by Carpetright' was trading from 272 stores (2011: 238). This area of the business delivered an increase in sales of 13.2% in the year and now represents 6.1% of UK sales revenue (2011: 5.1%). We believe this business has significant further growth potential in the coming year and we will be focusing on range development, improving customer awareness of our bed offer and reducing delivery times.

3. Managing and investing in our store portfolio

At the end of April we had 490 stores trading in the UK. During the last year, we opened 12 new stores and closed 61 stores, inclusive of the 16 concessions in Focus DIY, following that business entering administration. This resulted in a net store decline of 49 stores and translated to a reduction in net space of 244k sq ft, a decrease of 5.4% since the start of the year.

We continue to see an increasing trend for customers to use the internet to complete a significant proportion of pre-purchase research online. With growing numbers of customers prepared to travel further to make their single physical store visit to complete their purchase we believe that, over time, this will result in a shift in the required geographic density of our store estate. With leases on 88 stores due to expire in the next five years there is a natural opportunity to further reshape the portfolio in a cost effective way, reducing the size of the store footprint and lowering our ongoing rent roll.

During the second half we began a programme of store refurbishments to update and refresh our UK estate. This has involved improving natural light, updating signage, replacing floor coverings and upgrading in-store lighting. The response to an initial trial of 34 stores was encouraging with sales up around 10% compared to the rest of the like-for-like estate, delivering a pay back on the investment within one year. The new format is now in 62 stores and we are currently developing our plans for the continuation of this programme in the coming year.

In the Rest of Europe, we opened three new stores during the year and closed one store. This translated into a net increase of 12k sq ft of selling space, to a total of 1,570k sq ft in 142 stores (2011: 140).

Two of the new locations were 'sample only' stores, building on the successful trial opening of a similar store in the prior year. This new smaller format is expected to provide an opportunity for future growth in the store estate.

4. Reaching more customers through additional channels

In the UK, the internet has become a vital research tool for many of our customers and we continued to invest in our online presence during the year. On a weekly basis we are now achieving an average of over 70,000 unique visitors to our website, a 16% increase on the prior year and this has produced corresponding increases in both sample requests and appointment leads. We are investing in a larger team, recruiting individuals with the necessary skills and experience to ensure we maximise the opportunity. We have also focused activity to improve our conversion to sales ratio with the opening of a call centre manned by knowledgeable Carpetright people and by improved follow up at store level. This demonstrates the importance of having an effective and integrated multi-channel proposition.

We have continued to focus on gaining additional sales through the insurance replacement business. This has proved to be a challenge as we understand there has been a reduction in insurance renewals associated with the current economic conditions and a structural change in the procurement of goods and services by the agents of the insurers. The volume of business through this channel is currently small relative to the Group's total revenue, although we believe it offers an opportunity for profitable sales growth.

5. Ongoing focus on cost control and cash management

We are committed to an ongoing focus on cost control. This ensures we have an appropriate cost base for the current economic conditions.

We have a flexible sourcing policy and work closely with our suppliers to ensure we achieve the most competitive product costs.

We anticipate inflationary pressures to come from energy and business rates but expect to offset these with favourable negotiations with landlords, maintaining a flexible approach to matching store staff costs to the level of sales and continuing our programme of tendering for all non-merchandise goods and services.

The cash generative nature of the business has been supplemented by the sale and leaseback of nine freehold properties, enabling the year end net debt to be reduced by £46.6m to £19.1m. We intend to continue to reduce the level of debt within the Group.

Overview

Total sales decreased by 3.1% to £471.5m, reflecting the tough consumer environment in all the geographic markets where we operate. During the year, the Group opened 15 stores and closed 62 which gave a net decrease of 47 stores and a total store base of 632. Total store space declined by 3.8% to 5.8 million square feet.

Weak consumer demand was a significant contributor to the decline in underlying operating profit to £8.0m, a decrease of 62.2% on the prior year. Underlying net finance charges were £0.3m lower at £4.0m. These combined to generate an underlying profit before tax of £4.0m, a decrease of 76.3% on the prior year.

Exceptional items generated a surplus of £9.5m (2011: a charge of £10.3m), being net property profits partially offset by a combination of restructuring costs, non-cash store impairment and onerous lease charges.

As a result, profit before tax increased by 104.5% to £13.5m (2011: £6.6m). Basic earnings per share increased by 141.2% to 16.4p reflecting the increase in post tax earnings.

The combination of cash flow from continued underlying profitability, effective management of working capital, the control of capital expenditure and proceeds from the disposal of freehold properties, enabled net debt to be reduced by £46.6m to £19.1m (2011: £65.7m). The cash flow strength of the Group is highlighted by the fact that in the past three years net debt has been reduced by over 80% from £97.1m as at April 2009, in the most demanding of consumer environments.

A summary of the reported financial results for the year ended 28 April 2012 is set out below:

1. Where this review makes reference to "Underlying" these relate to profit/earnings before exceptional items.

Performance by Business

For year to 28 April 2012

1. Underlying operating profit is operating profit before exceptional items.

2. Like-for-like sales growth - calculated as this year's net sales divided by last year's net sales for all stores that are at least 12 months old at the beginning of our financial year. Stores closed during the year are excluded from both years. No account is taken of changes to store size or the introduction of third party concessions. Sales from insurance and housebuilders' contracts are supplied through the stores and included in their figures.

UK - Performance Review

The key financial results for the UK were:

Total UK revenue decreased 3.8% in the year to £381.6m. This performance can be attributed to three key factors:

i) the underlying retail flooring performance was down 2.7%;

ii) the focus on developing our bed offer and introducing it into more stores contributed 0.6% to growth;

iii) a fall in sales to the insurance and house builder businesses accounted for 1.7% of the decline.

After taking into account the movement in the number of stores the like-for-like sales for the year declined by 0.2%, with the first half down 2.4%, predominantly offset by a stronger second half, being an increase of 1.9%.

Gross profit declined by 8.8% to £224.8m, representing 58.9% of sales, a decrease of 3.3 percentage points. This movement is a combination of:

i) the decline in the underlying floor covering margin with demand higher in periods of stronger promotional activity, particularly in the first half of the year, contributing an adverse movement of 3.2 percentage points;

ii) a decline in the insurance business resulted in a change in the overall sales mix. This accounted for an increase of 0.3 percentage points (as this part of the business operates on a lower gross margin than retail floor coverings);

iii) the impact of fuel inflation on delivery costs accounted for an adverse movement of 0.4 percentage points.

The total UK cost base decreased by 2.9% compared with the prior year to £222.0m (2011: £228.7m). Store payroll costs continue to be managed closely to the volume of sales and reduced by 7.5% to £57.6m (2011: £62.3m). Store occupancy costs fell 1.7% to £127.5m (2011: £129.7m) due to a reduction in the number of stores, successful rent negotiations and reduced depreciation, although this was partially offset by increased utility and business rates inflation. The underlying rent in like-for-like stores decreased marginally by 0.2% (2011: 0.4%), reflecting a continued weakening of the property market in the current economic climate. Marketing and central support costs were up 0.3% at £36.9m (2011: £36.8m), primarily the result of one-off income received in the prior year relating to a successful VAT reclaim. The underlying movement was a decline of 2.7% with the largest element being the reduction in management and administrative headcount.

Underlying operating profit decreased by 84.3% to £2.8m.

Rest of Europe - Performance Review

The key financial results for the Rest of Europe were:

The Rest of Europe portfolio is now as follows:

Gross profit margin decreased marginally to 57.0% (2011: 57.1%), primarily due to the impact of the mix effect of selling more laminate at a lower than average margin, partially offset by improved rebates and effective management of the promotional mix. Reported operating costs decreased by 4.4% to £46.0m. In local currency terms, costs decreased by 6.7% despite inherent inflationary increases. The reduction came as a result of the negotiated salary and rent reductions, and the consolidation of central support functions. This reflects the tight management control and focus on achieving efficiencies within the whole operation.

The net result was an underlying operating profit of £5.2m, an increase of 52.9%. In local currency terms, the underlying profit increased by 65.0%.

Group Financial Review

Net Finance Costs and Taxation

Net finance charges were £4.0m (2011: £4.3m) reflecting lower average net debt and a reduction in the margin rates on borrowing. The effective tax rate on profits is 18.7% (2011: 30.4%). This decrease arises primarily from the impact of a change in tax rates and the release of previously held deferred tax provisions.

Exceptional Items

The Group recorded a net surplus of £9.5m (2011: charge of £10.3m) in the year.

We have continued to trade our property portfolio. In the year a profit of £13.4m was achieved (2011: profit of £0.5m). Of this, £14.5m was realised from the sale and leaseback of freehold properties from which we continue to operate. In the UK and the Netherlands these transactions were five individual stores sold to property investors. A group of four stores were sold to a single investor by way of the disposal of our Belgian property holding company, Infradis.

We have reviewed the carrying value of the store assets in our balance sheet, consistent with the approach in previous years. The models used to value these assets include a number of assumptions relating to market growth and inflationary expectations. The tests have led to a net impairment charge of £1.0m (2011: £2.0m).

In addition, there are seven leased properties which had previously been used as retail stores where an onerous lease provision has been made on the basis of the difference between the expected cash inflows and outflows and the re-assessment of previous positions.

In this difficult retail environment, the Group has focused on organisational changes aimed at enhancing our efficiency and leveraging our strengths to provide a solid framework for growth. This has involved a reduction in management headcount in the UK and the consolidation of our offices in Europe at a cost of £2.1m. Given the irregular nature and amounts associated with business restructuring these have been treated as exceptional items.

The unamortised costs associated with the previous refinancing, which amounted to £0.5m, were written off as an exceptional item.

Earnings per Share

Basic earnings per share increased to 16.4 pence (2011: 6.8 pence), reflecting a similar increase in post tax earnings. Underlying earnings per share decreased to 4.5 pence (2011: 18.0 pence).

Dividend

The Board has decided not to pay a final dividend (2011: nil pence), resulting in no full year dividend (2011: 8.0 pence).

Balance Sheet and Cash Flow

The Group had net assets of £70.7m (2011: £67.0m) at the end of the year, an increase of £3.7m since 30 April 2011. The cash generative nature of the business remains one of the strengths of the Group, with operating cash flow of £29.1m in the year (2011: £32.1m). The decrease was predominantly attributable to the reduction in underlying profitability, partially offset by improving working capital management, of which £4.5m related to the timing of the April payroll falling on the first working day of the following financial year.

Cash flow

Net capital receipts/(expenditure) was an inflow of £22.8m (2011: outflow of £9.5m). This can be broken down into the following principal categories:

After the repayment of borrowings, net debt decreased by £46.6m to £19.1m at the year end (2011: £65.7m).

Property

The Group owns a significant property portfolio, most of which is used for trading purposes. This portfolio is estimated by management to have a market value of £86.4m at the year end (2011: £134.0m), compared to a net book value of £83.3m recorded in the financial statements (2011: £112.3m). The movement in the year is predominantly the result of sale and leaseback transactions.

Pensions

The IAS 19 valuation as at 28 April 2012 was a net deficit of £4.3m in relation to defined benefit pension arrangements (2011: £4.0m). The Carpetright scheme closed to future accrual on 30 April 2010. Plan assets increased to £18.3m (2011: £17.4m) driven by higher market values and additional Company contributions agreed with the pension trustees following the triennial valuation in April 2008. The present value of plan liabilities increased to £22.6m (2011: £21.4m) driven principally by a reduction in the discount rate to 4.6% (2011: 5.3%).

Current liquidity

At the year end the Group held cash balances of £9.6m (2011: £8.3m) in a combination of Sterling, Euros and Polish Zlotys.

Gross bank borrowings at the balance sheet date were £26.0m (2011: £70.9m) of which £5.4m is term based with the balance of £20.6m being drawn down from overdraft and revolving credit facilities. The Group had further undrawn, committed facilities of £40.6m at the balance sheet date.

In June 2011, the Group completed a refinancing arrangement of its principal facilities, split between amortising term loans, a revolving credit facility and overdrafts in a mixture of Sterling and Euro currencies. The term loans and revolving credit facilities mature in July 2015. As at 28 April 2012, the facilities provided debt capacity of around £66m. Arrangement fees and legal costs are amortised over the period to June 2014, although paid in cash at the outset. The facilities contain financial covenants which are tested on a quarterly basis.

Outlook

Whilst the UK consumer environment is expected to remain difficult for all retailers in the discretionary spend sector, the move back into positive UK like-for-like sales in the second half was encouraging. While it is far too early to call the beginnings of a broader recovery, this performance gives some cause for optimism on the core UK floor coverings business. We have established a £23m revenue bed business in just three years and believe there is significant scope for us to grow this further, as we continue to develop the range, improve the proposition and introduce beds to more stores. In the Rest of Europe, we expect the economic conditions will remain challenging.

Against this backdrop, we will continue to drive the business towards long term growth by focusing on improving our product ranges and services, growing margins, focusing on cost reduction, reducing debt and promoting the reach of our brand. As a consequence, we believe the Group is well placed to capitalise on a strong value offer supported by a superior service proposition, when consumer demand in our sector improves.

Consolidated income statement

for 52 weeks ended 28 April 2012

All material items in the income statement arise from continuing operations.

Consolidated statement of comprehensive income

for 52 weeks ended 28 April 2012

The notes on pages 16 to 20 form an integral part of this consolidated financial information.

Consolidated balance sheet

as at 28 April 2012

Consolidated statements of cash flow

for 52 weeks ended 28 April 2012

For the purposes of the cash flow statement, cash and cash equivalents are reported net of overdrafts repayable on demand. Overdrafts are excluded from the definition of cash and cash equivalents disclosed in the balance sheet.

Consolidated statement of changes in equity

for 52 weeks ended 28 April 2012

Group

Notes to the accounts

1 Accounting policies

Basis of preparation

The financial statements of the Group are made up to the Saturday nearest to 30 April. The financial year for 2012 represents the 52 weeks ended 28 April 2012. The comparative financial year for 2011 was 52 weeks ended 30 April 2011.

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and International Financial Reporting Interpretations Committee (IFRIC) interpretations endorsed by the European Union, together with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The information is derived from the full Group financial statements for the 52 week period to 28 April 2012 and does not constitute full accounts within the meaning of section 435 of the Companies Act 2006. The Group's Annual Report and Financial Statements on which the auditors have given an unqualified report which does not contain a statement under section 498(2) or (3) of the Companies Act 2006, will be delivered to the Registrar of Companies and posted to shareholders in due course.

The financial information for the 52 weeks to 30 April 2011 is derived from the Annual Report for that year which has been delivered to the Registrar of Companies. The independent auditors reported on those accounts, their report was unqualified and did not contain a statement under either section 498(2) or (3) of the Companies Act 2006.

Foreign exchange rates

Financial assets and liabilities and foreign operations are translated at the following rates of exchange:

2 Segmental analysis

The operating segments have been determined based on reports reviewed by the Board that are used to make strategic decisions. From 1 May 2011 the Netherlands, Belgium and the Republic of Ireland were managed as a combined business by a single management team who had no other responsibilities, in the previous financial year the Republic of Ireland was combined with the UK. Prior year data in the statements that follow have been restated to reflect the change in reporting structure. The impact of the restatement is to reduce revenue in the UK by £7.9m and increase underlying operating profits by £3.4m, Europe moves by equal and opposite amounts. Information is presented to the Board of Carpetright plc (the Chief Operating Decision Maker) on a combined basis. As a result it is considered that the combined business forms a single reportable operating segment under IFRS 8.

The reportable operating segments derive their revenue primarily from the retail of floor coverings and beds. Central costs of the Group are incurred principally in the UK and are immaterial. As such these costs are included within the UK segment. Sales between segments are carried out at arm's length.

The segment information provided to the Board for the reportable segments for the 52 weeks ended 28 April 2012 is as follows:

Carpetright plc is domiciled in the UK. The Group's revenue from external customers in the UK is £381.6m (2011: £396.6m) and the total revenue from external customers from other countries is £89.9m (2011: £90.2m). The total of non-current assets (other than financial instruments and deferred tax assets) located in the UK is £162.9m (2011: £187.6m) and the total of those located in other countries is £74.4m (2011: £90.3m).

Carpetright's trade has historically shown no distinct pattern of seasonality with trade cycles more closely following economic indicators such as consumer confidence and mortgage approvals.

3 Exceptional items

In order to facilitate the sale of properties in Belgium, the Group sold a subsidiary that owned those properties during the year. There were no other assets or liabilities owned by the subsidiary at the time of the sale. Cash proceeds have been allocated to '(Profit)/loss on Property subsidiary disposal' in the cash flow statement.

The onerous lease provision relates to 20 properties in the UK and Republic of Ireland that are not trading and are either empty or leased at below the passing rent. The provision covers the period until full cost recovery is expected.

4 Tax

The tax charge for the year includes a charge of £3.1m in respect of exceptional items (2011: credit £1.7m). In addition, the impact of the change in tax rates on deferred tax liability has resulted in an exceptional tax credit of £1.6m (2011: £1.1m credit).

The weighted average annual effective tax rate for the period is 18.7% (2011: 30.4%). The decrease arises primarily from one-off tax charges in the prior year not recurring, the decrease in UK tax rates, the disproportionate effect of permanently disallowable items on the reduced level of profit and one-off gains not subject to tax.

5 Earnings per share

Basic earnings per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding those held by Equity Trust (Jersey) Limited (see note 25) which are treated as cancelled.

In order to compute diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. Those share options granted to employees and Executive Directors where the exerciseprice is less than the average market price of the Company's ordinary shares during the period, represent potentially dilutive ordinary shares.

Reconciliation of earnings per share excluding post tax profit on exceptional items:

The Directors have presented an additional measure of earnings per share based on underlying earnings. This is in accordance with the practice adopted by most major retailers. Underlying earnings is defined as profit excluding exceptional items and related tax.

6 Dividends

The directors decided that no final dividend will be paid (2011: No final dividend paid). This results in no dividend in the year to 28 April 2012 (2011: 8.0 pence; £5.4m).

7 Group movement in cash and net debt

Group