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RISKS & UNCERTAINTIES

EXAMPLES OF MITIGATING ACTIVITIES

Business strategy

Impact on shareholder value

• Inappropriate strategies

• Poor investment decisions

• Inadequate execution

Our strategic report on pages 5 and 6 details how Argos continues to progress towards retail digital leadership whilst maintaining its heritage and mass-market appeal by evolving the role of the traditional catalogue. Balancing the investment in Argos' Transformation and delivering shareholder value is of paramount importance to the Board.

Strategic issues, including risks and opportunities, are discussed at every Board meeting. All material investments are evaluated and monitored at both the Group Executive Board and the Board.

Programme governance structures are in place, supported by an established project management environment, with selected projects reviewed by Internal Audit. Considerable time is dedicated to strategic review, with regular performance reviews of strategic KPIs at various executive meetings.

We strive to effectively communicate with key stakeholders such as investors, colleagues and suppliers.

Trading environment

Impact on sales, gross margins, costs, profit and cash of:

• Economic and market conditions

• Cost of products/ services/ utilities

• Competitor activity

• Seasonality and/or weather

• UK-centric store network

The Argos business review

(pages 12 to 15) summarises

trading performance.

We operate in a highly competitive and diverse marketplace which demands both strategic and tactical risk management approaches. Commercial advantage is gained through breadth and depth of product ranges however this also attracts a broad set of competitors all with different dynamics.

The universal customer appeal strategy (page 14) within Argos aims to broaden customer appeal. Furthermore, price tracking versus our competition and dynamic pricing aims to ensure that price competitiveness is maintained. This, coupled with a planning process which supports the business through new product launches, seasonal changes, extreme weather variations and a programme of promotional activity, seeks to reduce trading risk from increased competitive pressures.

Sales in Argos are supported by our in-house Financial Services business, providing the option to promote on price and/or credit.

Cash generation is a key management objective (see remuneration scheme metrics on pages 41 to 52) and we maintain good relationships with our banks and credit insurers.

We have a well-established operational improvement programme which constantly reviews and challenges the Group's cost base to maintain our low-cost operating model.

Infrastructure/

development projects

Impact on costs and future capabilities

• Delay or failure to manage and implement major business and infrastructure projects effectively

• Reliance on third-party service providers

The Group's strategy is outlined on pages 5 and 6. Our governance framework is instrumental in ensuring the delivery of all aspects of the strategic plan.

Detailed planning, including review of any pilot learnings occurs prior to any subsequent roll-out. The Group Executive Board and the Board receive regular progress updates on all major change programmes. Post completion, major investments are subject to a post-investment review at various levels within the management structure.

Argos is investing in the recruitment of digital engineers and specialists to deliver the transformation agenda. Our in-house colleagues work alongside leading technology partners to enhance innovation and build the knowledge infrastructure for a sustainable digital future in addition to managing the day-to-day IT operations.

Our colleagues

Impact on service quality, innovation and costs

• Reliance on key personnel

• Availability of specialist skills

• Pension obligations

The Group values its colleagues and their contribution to the success of the organisation. Competitive remuneration packages, with oversight from the Remuneration Committee, in parallel with active succession planning, a strong focus on learning and development and both A-Level and Graduate recruitment programmes enable the Group to both attract and retain an engaged workforce.

We regularly review remuneration, benefits and employment policies to ensure we are able to retain and attract talented individuals.

In line with our strategy, colleagues continue to invest time in digital up-skilling which is also an enabler for workplace flexibility.

We are committed to open communications with colleagues at all times and monitor employee satisfaction through listening groups and employee forums.

A defined contribution pension scheme is accessible to all colleagues. We have a good relationship with the Trustees of the Group's closed defined benefit pension scheme which helps to ensure that we manage the scheme's obligations as efficiently as possible.

Our customers

Impact on sales, profit and growth potential

• Failing to meet customers' existing and future expectations

• Consumer preferences

• Changing demographics and behaviours

Understanding our customers is essential to the success of our strategy. We are investing to better understand our different customers so as to provide insight to enable us to improve our customer offering and Argos has introduced the Net Promoter Score (NPS) as a measure of customer satisfaction. This measure has been included in the FY17 broadband bonus scheme (see remuneration scheme metrics on page 45). We continuously engage with our customers, increasingly via social media, to gather feedback.

The launch of Argos Fast Track Delivery and Fast Track Collection, plus the expansion of our eBay partnership demonstrate how we are responding to the increasing needs of customers by providing convenience options for greater choice in how they shop.

The Group supports the Government's 'Go ON UK' initiative, which aims to improve digital inclusion across society.

Operations

Impact on costs and proposition

delivery of a failure to ensure appropriate processes are in place to manage the complexity of operations, including supply chain, multi-channel and customer service

Argos' significant change agenda puts pressure on day-to-day operations. Retaining our core competencies for competitive advantage is being achieved through executive oversight and cross-functional working parties. Product availability remains a key priority. We mitigate complex supply chain risks through robust processes and new initiatives to enable product immediacy for customers on a wide range of products.

As we continue to invest in our digital capabilities our focus is also on the supporting infrastructure to ensure a leading edge, multi-channel proposition is maintained.

Sourcing, product quality and safety

Impact on customers, costs and reputation

• Product failures

• Purchase of products whose cost base of manufacture is in currencies other than sterling, principally the US dollar

The Group has strong global sourcing capabilities and established buying operations in Asia and seeks further opportunities for sourcing efficiencies to control the cost of goods sold which thereby benefits customers.

The Group takes seriously the safety and quality of its products. We have a robust risk-based approach to assurance and are members of Sedex, a global audit data platform. All of our own-brand direct-source factories are audited against our ethical standards using an accredited scheme. We build successful partnership across our supply chain so that when issues are identified we can work collaboratively to drive improvements in productivity and benefit customers.

With over a third of products imported, the volatility of the global economy exposes the Group to both currency fluctuations, particularly the US dollar, and changes in freight costs. We hedge currency exposures and forward-buy freight commitments where possible.

Regulatory environment

Impact on costs and reputation

• Changes to/breach of UK and overseas legislation and regulation, eg consumer protection, environmental regulation

• Changes in UK fiscal/ employment policy, eg National Living Wage

• Changes to/breach of FCA requirements

Good governance practices are important to the Group, demonstrated through membership of industry representation groups, including the British Retail Consortium and ongoing engagement with regulatory bodies such as the Financial Conduct Authority (FCA).

We have specialists that ensure robust controls are in place to manage risks such as consumer law, health and safety, advertising standards, data protection and cyber security. We have also complied with the requirements of the National Living Wage legislation and we maintain compliance with other existing regulations and also monitor future developments through pro-active engagement with government and regulators.

As a leading retailer, the Group encourages diversity and equality.

Our financial services products are regulated by the FCA and through our retail credit accreditation the Group has made significant progress during the year in developing the robust mechanisms which are in place to manage all risks, including the approval of new products and its conduct towards customers, ensuring fair customer outcomes.

Business interruption

Impact on sales, costs and reputation

• Cyber-attack/terrorism/acts of nature

• Failure or unavailability of operational and/or IT infrastructure, eg website

• Delay or interruption in products or services provided by third-party suppliers

A major incident could impact the ability of the Group to continue trading. We manage this risk by maintaining and testing our business continuity plans regularly, investing in incident management training and establishing remote IT disaster recovery capabilities. The Argos website is a critical asset which is continuously monitored to maintain availability supported by incident management.

Cyber security is of paramount importance to Argos given the volume of customer data that is handled on a daily basis. Specialist teams identify threats and potential vulnerabilities and deploy a variety of controls on a continuous and risk-based approach to mitigate the risks.

The Group has robust contractual arrangements and comprehensive supplier management, particularly for key service partners. We actively monitor the supply base to identify exposures and identify suitable contingency solutions, working towards a sustainable outcome for all parties when issues arise.

Transactional risks arising

from the disposal of

Homebase

• Complex separation

• Smaller and less diverse Retained Group

• Increased costs

The process of separating Homebase from the Group is complex, involving the separation of significant business systems and operations. We entered into a Transitional Services Agreement which identifies how services will be provided during the transition period.

The disposal of Homebase necessitates a significant cost reduction programme for the Retained Group. There is a risk that this cost reduction program takes longer than anticipated, which would have an adverse impact on profit. We have already commenced this exercise and have a detailed plan to achieve the required savings in an appropriate period of time.

The reduction in size and diversification of the Group may increase the challenge of attracting and retaining talented colleagues.

The purchasing power of the Group may be reduced going forward. Although we have robust commercial relationships which we will leverage, the disposal of Homebase could prompt suppliers to seek to renegotiate supply arrangements.

Our exposure to seasonality risk has increased with the disposal of Homebase. Argos sales are highest in the Christmas trading period, whilst Homebase was typically strongest in the summer trading period as a result of external DIY and garden categories. The Group will no longer fully benefit from this seasonal diversification.

Risks arising from the

proposed purchase of the

Retained Group by

J Sainsbury plc

• Complex transaction

• Increased costs

The proposed purchase of the Retained Group by J Sainsbury plc will be complex and will create uncertainty which could increase the challenge of attracting and retaining talented colleagues, lead to an increase in costs, increase the difficulty of providing services to customers or disrupt relationships with suppliers.

There could also be a risk of lower levels of focus on delivering the Group's strategy in the period up to the possible transaction.