UCG.L Regulatory News (UCG)

UNITED CARPETS GROUP plc

Interim results for the period ended 30 September 2010

United Carpets Group plc ("the Group" or "the Company" or "United Carpets"), the second largest chain of specialist retail carpet and floor covering stores in the UK, today announces its interim results for the period ended 30 September 2010.

Headlines

·; Significant progress in successfully franchising corporate stores with the average number of corporate stores reducing to 11 from 20 and total stores up from 82 to 83

·; Network sales broadly maintained at £34.2m (2009: £34.5m)

·; Revenue decreased by 5.0% to £13.36m (2009: £14.06m) principally as a result of the successful franchising of corporate stores

·; Like for like sales decreased 5.3%

·; Adjusted operating profit* decreased by 18.0% to £534,000 (2009: £651,000)

·; Profit before tax decreased by 14.0% to £604,000 (2009: £702,000)

·; Cash and cash equivalents of £1.85m (2009: £1.38m)

·; Interim dividend maintained at 0.25p per share (2009: 0.25p)

* Adjusted operating profit excludes impairment of property, plant and equipment and movements in the provision against onerous leases

Paul Eyre, Chief Executive, said:

"This was a solid performance in a very challenging trading environment. Consumers remain cautious over spending, following uncertainty in the job market and the lack of any clear signs of economic recovery. However, United Carpets' focus on offering exceptional value combined with the benefits of our franchise model has ensured we have maintained our market position and continued to attract new franchisees. We continue to expand the business and have the financial flexibility to take advantage of any opportunities that come about as a result of the current slowdown and remain well placed to benefit as and when growth returns to the economy."

Enquiries:

Chairman's statement

The Group's interim results for the six months ended 30 September 2010 reflect the Company's ability to continue to deliver a satisfactory performance within these tough market conditions. Revenues were 5.0% lower for the period, which principally reflects the successful franchising of a significant number of corporate stores, replacing gross sales with franchised income which is lower but does not have the same associated running costs. Total store numbers increased slightly from 82 to 83 and have increased further since the period end to 86. As ever, the Group is committed to offering exceptional value to all its customers, providing extensive ranges at very competitive prices. The business is well funded and has a strong reputation within the regions in which it operates.

Financial review

Despite the market conditions network sales across the Group, including the value of retail sales by our franchisees (to give a measure of the Group's turnover on a more comparable basis to a conventional retailer), was broadly maintained at £34.2m (2009: £34.5m). Revenue, which as in previous years includes marketing and rental costs incurred by the Group and recharged to franchisees, was £13.36m (2009: £14.06m) principally reflecting the reduction in the average number of corporate stores during the period in comparison to the same period in the prior year.

Like for like sales across the whole of the network were 5.3% lower compared to the previous period. Given United Carpets' franchise structure, like for like sales are not necessarily the best measure of the Group's financial performance but they do provide a good steer on the overall trading performance. Within the like for like sales performance, the core flooring business was 3.1% lower on a like for like basis compared to the previous year whilst bed like for like sales were down by 24.2%.

Gross margin of 66.3% compares to 65.1% in the same period last year and 66.2% for the full year to 31 March 2010 reflecting the increased proportion of franchise related income to total revenue as Retail, Beds and Warehouse sales accounted for a smaller proportion of revenue as more corporate stores were franchised.

Distribution costs include staff costs at the corporate stores and the reduction in comparison to the same period in the prior year principally arises from the reduction in the average number of corporate stores. Administrative expenses increased by 3.0% as a result of increased marketing support for the franchise network.

Profit before tax was £604,000 (2009: £702,000) and earnings per share were 0.48p (2009: 0.56p).

The balance sheet continues to be robust with no borrowings, other than a small number of minor hire purchase contracts, and cash and cash equivalents were £1.85m (2009: £1.38m) despite an increase in trade and other receivables as a result of the increased number of corporate stores franchised during the period.

Dividend

The Board is pleased to announce a maintained interim dividend of 0.25p per share, reflecting our confidence in the long term strength and prospects of the business. The dividend will be paid on 27 January 2011 to those shareholders whose names are on the register on 7 January 2011.

Operations review

The majority of Group revenues are derived from the sale of floor coverings, predominantly carpet, laminate and vinyl flooring through franchised stores and the Group's own corporate stores. The Group ended the period under review with 83 branded stores across Northern and Central England. With the exception of 10 corporate stores, these were all franchises operating under United Carpets' bespoke franchise model.

While like for like sales were lower than the previous year, the relatively modest decline in profitability emphasises the natural advantages of the United Carpets franchise model over the more traditional retailer. During a more challenging environment, with weakened consumer confidence and continued uncertainty over jobs and further economic measures to support the economy, our franchised stores, run by owner-managers, are naturally more incentivised to perform but at the same time they can exploit the benefits of being a part of the wider branded Group. In this market environment, our customers are looking for value and will search harder to find the best available deals if they are going to replace existing flooring, the primary driver of our business. We pride ourselves on delivering value for money and on our franchisees providing excellent customer service and through these factors the business has been able to deliver a stable performance.

Advertising is a key part of the Group's marketing strategy, aimed at increasing brand awareness and promoting individual offers that underline our value for money ranges. In the period under review, we continued to carry out television advertising in targeted areas where we have sufficient critical mass of stores for this to generate economic returns. We also use radio, print and direct advertising strategies to increase brand awareness and drive sales across the Group. Advertising strategies operate at multiple levels, and are tailored for individual stores, geographic regions and across the whole network of stores.

Chairman's statement 

Franchising

We began the year with 70 franchised stores. During the period 3 new franchised stores have opened and 1 store has closed, temporarily, due to a fire. We have taken back 4 stores into the corporate arm and 5 corporate stores have been franchised. As a result, at the end of the period, the Group had 73 franchised stores.

Since the period end we have franchised a further 5 corporate stores, opened a new franchised store in Coventry and made 5 franchised stores into corporate stores. The net result of these actions is that the number of franchised stores increased to 74 currently.

It is a positive reflection on the Group, that new franchisees continue to be attracted to join United Carpets and the level of interest from potential new franchisees remains healthy.

Retail

We started the period with 12 corporate stores, 4 stores were taken back into the corporate arm, 5 were successfully franchised during the half and one corporate store closed (due to lease expiry) to give 10 corporate stores at the period end. Since then, 2 new corporate stores opened in Manchester and Birmingham, 5 stores became corporate stores and 5 corporate stores have been franchised so that we are currently operating 12 corporate stores. We aim to retain only two corporate stores as core stores, to enable training and product development, although in practice we expect to always have a handful of stores which are in the process of being franchised.

Flooring sales had been improving since the period end, however, the recent spell of atrocious weather (which was centered around our Northern heartland) had a significant impact on two of our busiest trading weeks and consequently like for like sales in the 10 weeks since the period end were a little lower, down 3.4%. We continue to believe that our network of stores are delivering a competitive performance in a tough market.

Beds

Against tough comparatives, following a significant improvement in Beds sales in the first half of the prior year, the performance in the period under review was disappointing, in part reflecting the more challenging environment and that the average sales price for beds is significantly more than with flooring. Since the period end, Beds sales have improved a little but continued to be substantially below last year, with like for like sales down 16.9%. Within the portfolio, however, there are many stores which are selling beds in high volumes, we are therefore confident the combination of beds and flooring is compatible and we are focused on improving the performance from this division.

Warehouse

The Group's in-house cutting operation for flooring continues to improve in efficiency and service benefiting in particular from the introduction of 7 day a week coverage. During the period, sales to the franchised network increased by 19.8%.

People

This was a challenging period and it has been rewarding to the see the whole team at United Carpets respond positively. Consequently, the Board would like to take this opportunity to thank all staff, franchisees and supplier partners for their commitment and contribution in the period under review and looks forward to working together towards a successful year.

Outlook

Whilst the market environment has remained tough in the 10 weeks since the period end, overall like for like sales have improved a little to 4.6% down on last year with improvements in the performance of the Beds division more than offsetting the adverse impact from the heavy snow falls. Whilst there is little evidence of any significant improvement in the market in the short term, United Carpets is well positioned to work through this period and capitalize on any opportunities that arise. Smaller, independent operators are likely to come under increasing pressure which may lead to opportunities to recruit experienced potential franchisees looking for the support of a larger network and/or new sites to acquire. With a strong brand, a healthy balance sheet and a clear strategy for developing the business, we are confident of continuing to meet our objective of generating shareholder value.

Peter Cowgill

Chairman

Independent review report to United Carpets Group plc

Introduction

We have reviewed the accompanying condensed consolidated interim balance sheet of United Carpets Group plc as at 30 September 2010 and the related condensed consolidated interim income statement, condensed consolidated statement of changes in equity and condensed consolidated interim statement of cash flows for the six month period then ended. Management is responsible for the preparation and fair presentation of this interim financial information in accordance with applicable law. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with applicable law.

RSM Tenon Audit Limited

Statutory Auditor

Nottingham

16 December 2010

Condensed consolidated interim income statement 

For the six months ended 30 September 2010

All amounts are attributable to the equity holders of the parent, and all arise from continuing operations. No amounts were recognised directly in equity, and therefore no separate statement of other comprehensive income has been presented.

* Adjusted operating profit excludes impairment of property, plant and equipment and movements in the provision against onerous leases

Condensed consolidated interim balance sheet

As at 30 September 2010

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2010

Condensed consolidated interim statement of cash flows

For the six months ended 30 September 2010

Notes to the condensed consolidated interim financial statements

1. Basis of preparation

United Carpets Group plc (the "Company") is a company domiciled in the United Kingdom. The condensed consolidated interim financial statements of the Company for the six months ended 30 September 2010 comprise the Company and its subsidiary undertakings (together referred to as the "Group").

The Group financial statements for the year ended 31 March 2010 were approved by the Board of Directors on 7 September 2010 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498(2) and 498(3) of the Companies Act 2006. These condensed consolidated interim financial statements do not comprise statutory accounts within the meaning of section 435 of the Companies Act 2006. These condensed consolidated interim financial statements for the period ended 30 September 2010 are unaudited but have been reviewed by the auditors and their Independent Review Report is included with these statements.

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2010.

2. Segment reporting

Segment information is presented in the condensed consolidated interim financial statements in respect of the Group's business segments, which are the primary basis of segment reporting. The business segment reporting format reflects the Group's management and internal reporting structure.

Inter-segment pricing is determined on an arm's length basis.

Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Business segments

The Group is comprised of the following main business segments:

§ Franchising

§ Retail

§ Beds

§ Warehouse

For the six months ended 30 September 2010

Retail was previously described as Flooring and Warehouse was previously described as Trade sales however the directors

consider that the revised descriptions better fit the nature of those segments.

Notes to the condensed consolidated interim financial statements 

3. Income tax expense

The tax charge accrued in these interim results reflects an estimated effective tax rate of 35% (30 September 2009: 35%) as a result of expenses not deductible for tax purposes and non-qualifying depreciation.

4. Property, plant and equipment

Acquisitions and disposals

During the six months ended 30 September 2010 the Group acquired assets with a cost of £787,000 (six months ended 30 September 2009: £407,000). Assets with a net book value of £13,000 were disposed of during the six months ended 30 September 2010 (six months ended 30 September 2009: £18,000), resulting in a gain on disposal of £Nil (six months ended 30 September 2009: £Nil).

Capital commitments

There were no capital commitments contracted for but not provided for at the period end (30 September 2009: £Nil).

5. Basic and diluted earnings per share

Basic earnings per share

The calculation of basic earnings per share for the six months ended 30 September 2010 was based on the profit attributable to ordinary shareholders of £392,000 (six months ended 30 September 2009: £456,000, year ended 31 March 2010: £683,000) and a weighted average number of ordinary shares outstanding during the six months ended 30 September 2010 of 81,400,000 (six months ended 30 September 2009: 81,400,000, year ended 31 March 2010: 81,400,000).

Diluted earnings per share

There are 2,155,171 share options which give rise to a dilution at 30 September 2010 (30 September 2009: Nil, 31 March 2010: 2,155,171).

The calculation of diluted earnings per share for the six months ended 30 September 2010 was based on profit attributable to ordinary shareholders of £392,000 (six months ended 30 September 2009: £456,000, year ended 31 March 2010 £683,000) and a weighted average number of ordinary shares outstanding during the six months ended 30 September 2010 of 81,535,942 (six months ended 30 September 2009: 81,400,000, year ended 31 March 2010: 81,480,759), calculated as follows:

6. Employee benefits

Pension plans

The Group provides employee benefits under defined contribution pension plans, the details of which are disclosed in the most recent annual financial statements.

Expense recognised in the consolidated interim income statement

Theexpense recognised in the consolidated interim income statement consists of contributions made to the defined contribution scheme. For the six months ended 30 September 2010, the Group recognised expense of £48,000 (six months ended 30 September 2009: £42,000, year ended 31 March 2010: £88,000).

Notes to the condensed consolidated interim financial statements 

7. Financial instruments 

Interest-bearing loans and borrowings

In the opinion of the directors there is no significant difference between the fair value of hire purchase contracts and the carrying value in the financial statements.

Trade and other receivables/payables

The carrying value is deemed to reflect the fair value for all trade and other receivables/payables.

8. Cash generated from operations