HORNBACH HOLDING Aktiengesellschaft

Transcription

1 HORNBACH HOLDING Aktiengesellschaft A N N U A L R E P O R T /

2 KEY GROUP, FINANCIAL AND OPERATING INFORMATION Amounts shown in million unless otherwise stated Change 2001/ / /2000 in financial year 2001/2002 Sales and profits data on the previous year Gross sales 10.3% 1,730 1,569 1,395 of which: in other European countries 18.8% Net sales 10.2% 1,490 1,352 1,202 Sales increase as a % of net sales Result from ordinary activities 2.6% as a % of net sales Net income for the year 13.0% as a % of net sales EBITDA 1) 12.8% as a % of net sales DVFA/SG result 73.6% Gross margin as a % of net sales Store costs as a % of net sales 2) General and administrative costs as a % of net sales Pre-opening costs as a % of net sales of which: personnel costs as a % of net sales Cash flow data Capital investments 18.8% Proceeds from disposals Net investment 66 3) Gross cash flow 4) 0.3% as a % of net sales Earnings potential 5) 1.5% as a % of net sales Net cash flow 6) 3.0% as a % of net sales Dividend payments Presentation of depreciation costs Total depreciation 45.2% as a % of net sales Presentation for international comparison: Straight-line depreciation 45 years Additional straight-line depreciation 25/10 years to 45 years Declining balance depreciation Depreciation in line with section 6b EStG Special depreciation allowed in eastern Germany Total depreciation on buildings Depreciation on other fixed assets of which: special depreciation allowed in eastern Germany Balance sheet and financial data Balance sheet total 7.7% 1,209 1,123 1,072 Fixed assets 7.7% Inventories 14.7% Cash and cash equivalents 35.3% Shareholders equity Special tax reserves (section 6b EStG) Additional depreciation on fixed assets (e. g. section 6b depreciation) Shareholders equity (commercial) 7) Shareholders equity as % of total assets Inventory turnover frequency per year Other information Employees annual average in full time equivalents 10.8% 7,025 6,343 5,589 Net interest expense as a % of net sales Number of shares 8,000,000 8,000,000 8,000,000 DVFA/SG net cash flow per share in 25.5% DVFA/SG result per share in 91.5% Overview of earnings Result of the rest of the HOLDING Group Result of HORNBACH-Baumarkt-AG subgroup Result of HORNBACH Immobilien AG subgroup Result from ordinary activities (group) Extraordinary result Taxes Net income for the year Minority interests share of earnings 8) Net income after minority interests share of income ) EBITDA (exc. depreciation under section 6b EStG) 2) Store costs less 6b depreciation 3) Including proceeds from sale and lease back transactions in previous year ( 44.6 million) received March 1, ) Result from ordinary activities plus scheduled depreciation 5) Gross cash flow plus pre-opening costs 6) Net income plus scheduled depreciation 7) Exc. deferred taxes 8) Independent shareholders of HORNBACH-Baumarkt-AG (6.5) and minority interests UBZ Becker (0.1)

3 1998/ / / / / / /93 1,211 1, , ,926 4,529 3,899 3,356 2,835 2,285 1, ,000,000 8,000,000 8,000,000 8,000, , , ,

4 CONTENTS Corporate Profile Executive Bodies Report of the Supervisory Board To our Shareholders Group Overview and Shareholders of HORNBACH HOLDING AG 9 Management Report and Group Management Report of HORNBACH HOLDING AG Trading and real estate HORNBACH-Baumarkt-AG HORNBACH Baustoff Union GmbH Lafiora HORNBACH Florapark GmbH HORNBACH Immobilien AG The HORNBACH HOLDING Share Annual Financial Statements and Consolidated Financial Statements of HORNBACH HOLDING AG Balance Sheet Income Statement Consolidated Balance Sheet Consolidated Income Statement Notes to the Annual Financial Statements and Consolidated Financial Statements Auditors Report Please turn over

5 Corporate Profile The ability to respond to the challenges of trading in retail building materials, DIY supplies and garden products and to set new standards in the process is what makes the HORNBACH Group special. From 1877 onwards, five generations of Hornbachs have been active in almost all areas of the construction sector in the building trade, as manufacturers of prefabricated components, and (starting in 1900) as builders merchants. In 1968, HORNBACH, as one of the pioneers in Germany and Europe, opened its first DIY store, combined uniquely for Europe with a garden center. This combination has become a European standard today. In the second half of the 80s (and even more so since 1990), HORNBACH has added a new dimension to the market with its concept of large DIY superstores and garden centers. Today, an impressive range of around 50,000 top quality DIY and gardening articles is available to DIY customers in spacious stores and at permanently low prices, with an impressive presentation. Welltrained, service-orientated employees ensure that the customer is king. As of February 28, 2002, there were 91 DIY superstores and garden centers operating in Europe under the responsibility of the subsidiary HORNBACH-Baumarkt-AG, and three stand-alone garden centers under the responsibility of Lafiora HORNBACH Florapark GmbH with total sales area of c. 901,000 sq. m. (9,685,750 sq. ft.). In addition, the group is active in the builders merchant business through HORNBACH Baustoff Union GmbH which operates with, primarily, business customers. HORNBACH HOLDING AG and, to some extent, HORNBACH Immobilien AG are responsible for the development and utilization of first-class retail locations. HORNBACH is the market leader in Germany among operators of large DIY superstores and garden centers with sales areas in excess of 8,000 sq. m. (86,000 sq. ft.). In terms of total turnover, HORNBACH is also one of the leaders with sales of 1.73 billion in the financial year 2001/2002. After the successful move into Austria in August 1996, expansion in neighbouring European countries was consistently pursued. Stores were subsequently opened in the Netherlands, Luxembourg and the Czech Republic. The first DIY superstore and garden center in Switzerland will open in the financial year 2002/2003. Currently, preparations are under way for entering the Swedish market. As of February 28, 2002, HORNBACH is operating a total of 16 DIY superstores and garden centers outside the territory of the Federal Republic of Germany. This number is expected to increase to 24 in the current financial year 2002/2003. Opportunities for expansion in Germany are also continually pursued. In the current financial year 2002/2003, for example, up to four new HORNBACH DIY superstores and garden centers will open in Germany. HORNBACH HOLDING AG itself is not an operating company, but has a number of major subsidiaries. By far the largest and most important subsidiary is HORNBACH-Baumarkt-AG, which operates large DIY superstores and garden centers in Germany and abroad; this company s ordinary shares are listed on the German Stock Exchange in floating-price dealing and on SMAX and are part of SDAX. Some 80% of the company s c. 15 million ordinary shares are held by HORNBACH HOLDING AG, and the remaining c. 20% are held by independent shareholders. Other operating activities are carried out by HORNBACH Baustoff Union GmbH and Lafiora HORNBACH Florapark GmbH. Much of the extensive real estate of the HORNBACH Group is held by HORNBACH Immobilien AG, an unlisted company with a subscribed share capital of 51 million, which is wholly held by HORNBACH HOLDING AG. The subscribed capital of HORNBACH HOLDING AG is divided equally between ordinary shares and non-voting preference shares. The 4 million preference shares are held by independent shareholders and are listed on the German Stock Exchange in the floating-price market. The shares are listed on SMAX and SDAX. 75% of the 4 million unlisted ordinary shares are held by the family. Kingfisher plc., London, the UK retailing group, holds 25% plus one share of the voting capital. CORPORATE PROFILE 1

6 Executive Bodies Supervisory Board Supervisory Board Gerhard Wolf Chairman Diplom Kaufmann, Worms (Graduate in Business Administration) Dr Wolfgang Rupf Deputy Chairman Managing Director of AKV Altkönig Verwaltungs GmbH, Königstein Reinhard Eyring (until April 24, 2002) Lawyer, Frankfurt am Main Dr Claus Gastroph (until April 24, 2002) Notary, Munich Albert Hornbach (from April 25, 2002) Former member of the Board of Management of HORNBACH HOLDING AG, Bornheim Supervisory Board Committees: Finance and Audit Committee (from April 25, 2002) Gerhard Wolf Dr Wolfgang Rupf Otmar Hornbach Helen Weir Personnel Committee Gerhard Wolf Dr Wolfgang Rupf Dr Claus Gastroph (until April 24, 2002) Otmar Hornbach (from April 25, 2002) Sir Geoffrey Mulcahy (from April 25, 2002) Mediation Committee (from April 25, 2002) Gerhard Wolf Dr Wolfgang Rupf Otmar Hornbach Sir Geoffrey Mulcahy Otmar Hornbach (from April 25, 2002) Former member of the Board of Management of HORNBACH HOLDING AG, Annweiler am Trifels Sir Geoffrey Mulcahy (from April 25, 2002) Chief Executive of Kingfisher plc., London Dr Alexander Schmidt (until April 24, 2002) Managing Director of IPG Automotive Engineering Software+Consulting GmbH, Karlsruhe Helen Weir (from April 25, 2002) Group Finance Director of Kingfisher plc., London Dr Susanne Wulfsberg (until April 24, 2002) Veterinary surgeon, Neritz 2

7 Executive Bodies Board of Management Board of Management Otmar Hornbach Businessman Chairman (until October 31, 2001) Albrecht Hornbach Diplom-Bauingenieur (Graduate in Civil Engineering) Chairman (from November 1, 2001) Superstores and garden centers; audit; public relations Eduard Zimmerle Businessman Deputy Chairman (from November 1, 2001) Expansion; property Albert Wilhelm Hornbach Businessman (until October 31, 2001) Roland Pelka Diplom-Kaufmann (Graduate in Business Management) (from November 1, 2001) Finance; accounting; controlling; investor relations; legal matters Bernd Weisenburger Diplom-Betriebswirt (Graduate in Business Administration) (from November 1, 2001) Building materials trading EXECUTIVE BODIES 3

8 Report of the Supervisory Board Gerhard Wolf During the financial year 2001/2002, the Supervisory Board performed its duties under statute and the articles and monitored the Board of Management s conduct of business, assisted the Board of Management in an advisory capacity, and kept itself regularly informed as to the general course of business and the situation of the company. The intended business strategy of the HORNBACH group was discussed in detail. At four regular meetings, on June 18, 2001, August 30, 2001, October 24, 2001 and February 20, 2002, the Supervisory Board received verbal and written reports from the Board of Management, and also discussed the participation of 25% plus one share by Kingfisher plc in the voting capital and explored the prospects. The subjects discussed were, primarily, the development of earnings in the subsidiaries compared to the budget and the previous year and the investment and financing policy. The Supervisory Board was informed extensively and in good time of all measures requiring its approval. Following the review and discussion of these matters, the Supervisory Board granted all the required approvals. The Chairman of the Supervisory Board was in regular contact with the Chairman of the Board of Management to discuss key issues of corporate policy. In addition, the Board of Management reported regularly on the state of the company as well as on the development of its earnings and financial position. In particular, it provided the Supervisory Board with the following documents: the audited annual financial statements; the monthly reports on the development of sales and earnings; the quarterly financial statements; the sales and earnings budgets and the investment and financial budgets for the financial year 2002/2003; the medium-term financial planning up to the financial year 2005/2006. The annual financial statements of HORNBACH HOLDING AG, the consolidated financial statements as of February 28, 2002, and the combined management report/group management report were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, who were appointed by the Annual General Meeting; these were issued with an unqualified auditors report. The auditors also reviewed the risk early warning system in place at HORNBACH HOLDING AG. This review showed that the system is fulfilling its functions. KPMG were appointed in writing on December 7, 2001 by the Chairman of the Supervisory Board, representing the whole Supervisory Board and acting in accordance with the resolution of the Annual General Meeting, to audit the annual financial statements. The annual financial statements, the management report and the audit reports were submitted to all members of the Supervisory Board in good time and were discussed in detail at the Supervisory Board s meeting, devoted to the annual financial statements, on June 18, The auditors also attended this meeting, reported on significant results arising out of the audit and answered questions. The Supervisory Board has reviewed conclusively, the annual financial statements and the consolidated financial statements of HORNBACH HOLDING AG as of February 28, 2002, the proposal for the appropriation of retained earnings, as well as the management report and the Group management report, and has raised no objections. The Supervisory Board is in agreement with the results arrived at by the auditors. It has approved the annual financial statements prepared by the Board of Management. The annual financial statements are accordingly adopted. The Supervisory Board approves the proposal by the Board of Management for the appropriation of retained 4

9 earnings which, as in the previous year, envisages a dividend of 1.14 per preference share and 1.08 per ordinary share. The Supervisory Board has acknowledged and approved the consolidated financial statements, the Group management report and the auditors report. The Personnel Committee met twice, on October 24, 2001, and on February 20, At the meetings, appointments and contractual details concerning members of the Board of Management were discussed. After Albert and Otmar Hornbach resigned from the Board of Management after many years service for reasons of age on October 31, 2001, it was necessary to appoint new members to the Board of Management. The new members of the Board of Management appointed with effect from November 1, 2001, were Albrecht Hornbach, Roland Pelka and Bernd Weisenburger. Albrecht Hornbach was appointed Chairman of the Board of Management and the former Board of Management member, Eduard Zimmerle, was appointed Deputy Chairman. We thank Albert and Otmar Hornbach for their long years of exceedingly successful work in the HORNBACH Group. We also wish the newly-appointed members of the Board of Management of HORNBACH HOLDING AG every success in leading the company. As a result of the participation by the British company, Kingfisher plc, of 25% plus one share in the voting capital of the company, the members of the Supervisory Board felt it necessary to resign in order to give the shareholders the opportunity to change the composition of the Supervisory Board. At an Extraordinary General Meeting on April 24, 2002, the new elections were accordingly held for the shareholder representatives on the Supervisory Board of HORNBACH HOLDING AG. Gerhard Wolf and Dr Wolfgang Rupf were re-elected; Sir Geoffrey Mulcahy (Chief Executive of Kingfisher plc), Helen Weir (Group Finance Director of Kingfisher plc) and Albert and Otmar Hornbach were newly elected. In the following constituent meeting of the new Supervisory Board, Gerhard Wolf was elected chairman and Dr Wolfgang Rupf Deputy Chairman of the Supervisory Board. In addition the members were elected for the Personnel Committee, Mediation Committee and Finance and Audit Committee. We particularly thank the former members of this Board whose services are no longer available: Dr Susanne Wulfsberg, Reinhard Eyring, Dr Claus Gastroph and Dr Alexander Schmidt, for their many years of constructive and reliable work on the Supervisory Board. The Extraordinary General Meeting on April 24, 2002, also resolved to relocate the registered office of the company to Neustadt an der Weinstrasse. We wish to convey our thanks and appreciation to the Board of Management and staff of the HORNBACH Group in Germany and abroad for their commitment and successful work in the past financial year. Bornheim, in June 2002 On behalf of the Supervisory Board Gerhard Wolf Chairman REPORT OF THE SUPERVISORY BOARD 5

10 To our Shareholders Albrecht Hornbach Dear Shareholders, The only constant feature in life is change. The retail industry in Germany in particular has experienced time and again since the mid-nineties and with growing intensity that this long path of continuous change also includes a number of difficulties and adversities, in this case in form of declining consumer spending. We have to keep rearranging the reference system used as a basis to reliably determine our success with absolute figures if we want these figures to reflect reality. We cannot do so without comparing our performance to the performance of the industry as a whole. The past financial year was again marked by unfavorable developments, and this goes for HORNBACH as well as for the huge retail sector of building materials, garden and DIY products in Germany. In addition to the horrific events of September 11, 2001 special developments had a detrimental effect on the beginning as well as on the end of the financial year. We suffered from the frosts of spring 2001, resulting in a decline in earnings by almost 10% at the beginning of the year. The end fell victim to the euro launch. Consumers showed a very hesitant shopping behavior in January and February of They felt deprived of price orientation and feared hidden price increases. Our figures show that we overcame these handicaps quite well, both on part of HORNBACH HOLDING AG and the most important subgroup, HORNBACH-Baumarkt-AG. Our retail activities resulted in a sales growth of 10%, the result of ordinary business activities and gross cash flow remained at the previous year s level. The group s figures were slightly below this level, the subgroup fared slightly better. Pre-tax return on sales fell slightly, but it remains within the range of four years of 3% to 3.2% for the HORNBACH-Baumarkt-AG subgroup. This is remarkable in a phase of rapid growth under very difficult conditions. For the group as a whole, figures are even more difficult to compare for reasons of discontinuity not due to our retail activities. Earnings of sale and rent back transactions on the one hand and the complete write-off of our stake in the US retail company Dekor Inc. (Atlanta), which was not deductible from taxes, on the other hand, resulted in a considerably higher EBITDA. Our net income and the DVFA/SG result, however, were therefore considerably below previous year s level. We can definitely not be satisfied with the absolute level of earnings achieved in the year under review. Compared to the development of the industry as a whole, and in particular when looking at the figures published by our competitors, however, it turns out that HORNBACH has made headway and is able to set its own economic pace. Since 1999 HORNBACH has improved its position in the sales league of the leading DIY companies year for year, and we are now number four. An even more important figure to compare our performance to our retail competitors is the development of like-for-like sales. In this respect we can clearly state that HORNBACH is outstripping its competitors. Since 1999 same store sales of our German DIY stores have gained 2.3% in accumulated figures, putting the company 10% ahead of the industry as a whole which lost 7.3%. 6

11 HORNBACH continually increased its market share in Germany. It rose from 4.9% in 1998 to over 6% in The trend of the current financial year is clearly on the rise, even though HORNBACH is by no means focusing its growth efforts on Germany alone. As a matter of fact HORNBACH is gaining market share in Germany and at the same time expanding rapidly into other European countries. We feel at home in our core business, the market of building materials, garden and DIY products. Not even the fact that the obviously difficult economic conditions are more a liability than an asset for general wellness can change this situation. The economic situation in Germany stimulates our ambition because this is the acid test of the strength and success of our retail concept. This is why we are convinced that HORNBACH will emerge as a winner from the inevitable consolidation of this industry. Germany is a very promising market for operators of DIY stores with garden centers, even if international reports on our industry at first sight might make you think this were not the case. The highlights, though, only come to the fore through a more detailed analysis. Germany is Europe s biggest market for buildings materials, garden and DIY products, bigger than France and the UK together, and has even more potential in store for us. So far the share of the retail model of DIY stores with garden centers in terms of sales volume of the overall market is still quite low at only 20%. Even if we just consider DIY sales in Germany, the DIY industry only covers about one-third of the demand, according to an IFW 1 survey. The lion s share is covered by other retail concepts. There is still a lot to do and much to gain for the DIY industry which has specialized on the DIY customer. All the more so, if consumption activities, currently hesitant, start booming again one day. And there is something else to stimulate our imagination: investment in the construction sector has been declining in recent years, but according to the IFW the DIY volume in new construction has grown not only relatively but in absolute terms. The DIY industry, however, did not benefit from this trend. The additional DIY volume remained with the other retail concepts, i. e. specialist retailers and builders merchants. This fact gives rise to the assumption that it makes perfect sense to work on one single market with two different retail concepts simultaneously. This is why we stick to the idea of expanding the builders merchant business within our group. One reason being that our 125- year-old company is deeply rooted in this sector. The other reason is our know-how on how to generate additional volume with our own clients. It will turn out to be very fruitful for our DIY stores as well as for the builders merchant business to get to know our own customers even better. The DIY superstores and garden centers, the builders merchant business and the Lafiora garden centers all benefit from the best practice approach with its total focus on the customer. This focus will help retail activities within the group to grow sustainably based on a real estate strategy which is essential for future expansion. In this context we consider the strategic alliance with Kingfisher as a decisive step forward. It provides us with a strong and competent partner for international cooperation, and safeguards entrepreneurial independence in the long run, which is indispensable to maintain our culture and thus our success. I am very proud to see how our workforce fully supports the strategic partnership. They know what is at stake and are fully committed in their daily work to make sure their company gets ahead. They are the driving force behind our success, and I would like to thank them warmly. Albrecht Hornbach Chairman of the Board of Management 1 IFW: Institut für Freizeitwirtschaft (Institute for Leisure Time Industry), headquartered in Munich. TO OUR SHAREHOLDERS 7

12 Group Overview and Shareholders of HORNBACH HOLDING AG Status as at February 28, 2002 HORNBACH DIY superstore and garden center Prague by night Independent shareholders Preference shares 1 (WKN ) Hornbach families Ordinary shares 2 (WKN ) Kingfisher plc Ordinary shares 2 (WKN ) 50% 37.5% less one share 12.5% plus one share Independent shareholders Ordinary shares 1 (WKN ) HORNBACH HOLDING AG Neustadt/Weinstrasse ( 366 million) 4 20% 80% 1 100% 100% 100% HORNBACH- Baumarkt-AG 3 Bornheim ( 279 million) 4 HORNBACH Immobilien AG 3 Neustadt/W. ( 55 million) 4 Lafiora HORNBACH Florapark GmbH Neustadt/W. ( 3 million) 4 HORNBACH Baustoff Union GmbH 3 Neustadt/W. ( 10 million) The share capital of HORNBACH HOLDING AG totals 24,000,000 and is divided into 4,000,000 ordinary shares (held by the Hornbach families and Kingfisher plc.) and 4,000,000 non-voting preference shares that are listed on the German Stock Exchange. The share capital of HORNBACH-Baumarkt-AG amounts to 45,034,500 and is divided into 15,011,500 ordinary shares that are listed on the German Stock Exchange. The HORNBACH HOLDING AG holds 12,000,000 ordinary shares as participation in HORNBACH-Baumarkt-AG. Plus additional direct and indirect participations in affiliated companies; please refer to page 35 for a complete list. 1 Listed 2 Unlisted 3 Plus additional affiliated companies in Germany and outside Germany 4 Book shareholders equity of the respective part of the Group at the balance sheet date February 28,

13 Management Report and Group Management Report of HORNBACH HOLDING AG The world economy in a crisis For the first time since the 1973 oil crisis, the most important industrialised nations the USA, Japan and Germany are all in recession at the same time. The economic downturn started in North America in the middle of last year, and spread with differing time lags and intensity to the rest of the world. This adverse trend was initiated by the sharp rise in oil prices, a glut of US securities on the international capital markets and the preceding abrupt tightening of monetary policy in most western industrialised nations, which toppled first the US and then the European stock markets into a decline. This prompted investors and consumers alike to scale back demand significantly. The appalling terrorist attacks on New York s World Trade Center and the Pentagon on September 11, 2001 unnerved investors and consumers, adding further pace to the downturn. The German economy went into recession in the second half of 2001, with total output falling 0.5% in the third quarter and 1% in the fourth. As a result, the original target for GDP became unattainable: instead of the c. 2.0% growth expected at the beginning of 2001, first estimates put actual growth at only 0.6%. Under these circumstances, the improvement that had emerged in the labour market at the start of 2001 unfortunately proved unsustainable: after falling to only 10.1% in February 2001 unemployment rose again to 10.4% by the end of our financial year in February As in previous years, the unemployment rate in eastern Germany of 19.1% in February 2002 was still significantly higher than the level in western Germany (8.3%). Overall, the impact on the economy was sharper than expected, turning a forecast slowdown in economic growth into a steep decline. However, this seems to have bottomed out, with the ifo Business Climate index rising in January 2002 for the second time in succession. Whether this turns into a new upswing over the next few months depends decisively on the behaviour of consumers. For now, however, consumers in Germany and other European countries are showing clear reluctance to spend. There is much speculation over the reasons for this, with one possible cause being the continuing debate (periodically fanned by the media) about hidden price increases in connection with the introduction of the euro as the sole legal tender. The argument is that there has been significant damage to consumer confidence in suppliers of goods and services. While there are undoubtedly a few black sheep in retailing who took advantage of the introduction of the euro to raise their prices, we believe that the majority of retailers have behaved in an exemplary manner, converting prices fairly these include HORNBACH. However, consumers subjective view is not affected by daily shopping, but rather by negative experiences which stick in their memory. Some service providers and restaurants in particular have exploited the euro launch shamelessly to increase prices. Even so, this had minimal influence on the inflation rate statistics. As a year, 2001 was a weak one for retailing generally: provisional estimates show that sales in classic retailing in calendar year 2001 were 0.6% down in real terms on the figure for calendar year Not even the tax reforms were able to help turn retailing around, and in fact consumers are spending less in real terms on retail products than in This contrasts with most other European countries, where there has been real growth of well over 20% in the last few years. There are many reasons for the weak performance of German retailing in The uncertain geopolitical situation after September 11, 2001 is undoubtedly one reason. However, the economic downturn is also playing a major role: when German consumers are worried about their jobs, they typically hold off on purchases of expensive consumer durables. In the meantime, in 2001 Germany ranks next to last in the EU in growth of retail sales. Investment in construction also fell in 2001, following the decline of 2.7% in the previous year, with an even steeper drop of 6.6%. The state of house building continues to be unsatisfactory. MANAGEMENT REPORT 9

14 Gross sales HORNBACH HOLDING AG Group ( million) DIY industry hit by the drop in sales As a year, 2001 was unsatisfactory for the DIY superstore sector in Germany. The Bundesverband Deutscher Heimwerker Bau- und Gartenfachmärkte e.v. (BHB) reported an overall decrease in like-forlike sales in 2001 of 3.5%. This followed a decline of 2.0% in the sector s sales in both 1999 and At the same time, growth in sales area continued unabated, with the BHB reporting an increase of 3.6% in the sales area of DIY superstores in Germany, rising from 13.8 million sq. m. (148.4 million sq. ft.) to 14.3 million sq. m. (153.7 million sq. ft.). This expansion in sales area enabled DIY superstores larger than 1,000 sq. m. (10,750 sq. ft.) to achieve a slight increase in sales of 0.5% to billion. HORNBACH beats the industry trend HORNBACH is successfully operating against the industry trend. In the face of continuing difficult economic conditions, HORNBACH performed extremely well, raising consolidated sales (including VAT) from 1,569 million in the previous year to around 1,730 million in the year under review. Gross sales were thus 161 million, or 10.3%, higher than in the previous year. Consolidated net sales increased to 1,490 million (previous year: 1,352 million). The lion s share of sales (over 96%) again came from HORNBACH-Baumarkt- AG, the most important operating subgroup. As market leader in large DIY superstores and garden centers, it reported sales of 1,669 million (gross) and 1,437 million (net). Sales also developed very well outside Germany. The 16 HORNBACH DIY superstores and garden centers in the Netherlands, Luxembourg, Austria and the Czech Republic at the balance sheet date generated sales of 376 million (previous year: 316 million), representing just under 22% of Group sales. In the past 2001/2002 financial year, the number of DIY superstores and garden centers operated by HORNBACH-Baumarkt-AG rose from 82 to 91, with a total sales area of 887,427 sq. m. (9,539,840 sq. ft.). The average sales area per store is now 9,752 sq. m. (102,448 sq. ft.). With three stand-alone garden centers, including the garden center opened in October 2001 in Germersheim am Rhein, Lafiora HORNBACH Florapark GmbH reported sales of 13.3 million ( 11.8 million net). In the financial year 2001/2002, HORN- BACH Baustoff Union GmbH increased the number of its branches to nine through the acquisition of the operations of three medium-sized builders merchants. Sales totalled 49.0 million (gross) or 42.1 million (net), representing an increase of c. 51% on the previous year. Despite the decline in the sector-wide sales in Germany, HORNBACH DIY superstores and garden centers reported like-for-like growth of 1.4% in the financial year 2001/2002 (previous year: 2.5%). After a poor start to the financial year 2001/2002 due to weather conditions, and a slight drop in the first quarter (0.1%), HORNBACH DIY superstores and garden centers gained ground steadily over the following quarters, and after nine months (i.e. up to and including November 2001) had boosted sales by 2.0%. This generally good performance was marked particularly by the continuing strong growth of our foreign stores, with the German regions contributing only a small increase. The last quarter of the period under review (i.e. December to February) was not satisfactory overall: while there was still some slight growth in December, sales dropped sharply in Germany, in particular at the start of January, because of the cold weather and consumer reluctance to purchase, presumably in connection with the launch of the euro. The result was a significant decline in like-for-like sales. February, however, saw a return to growth, so that the overall result for the fourth quarter was only a slight decrease of 1.1%. The growth in full-year like-for-like sales of 1.4% was due mainly to the strong performance of HORNBACH DIY superstores and garden centers in the Netherlands, Austria, the Czech Republic and Luxembourg, where like-for-like sales grew 7.9% in the year under review. In Germany, likefor-like sales were, for the most part, maintained (-0.3%) despite the difficult competition situation, with sales doing better in western Germany (0.6%) than eastern Germany (-3.8%). The share in the DIY superstore industry in Germany (total volume: 21.5 billion) rose from 5.7% to over 6.0%. 10

15 Result from ordinary activities ( million) Earnings only slightly down on previous year despite exceptional charges The HORNBACH HOLDING AG Group includes HORNBACH-Baumarkt-AG, HORNBACH Baustoff Union GmbH, HORNBACH Immobilien AG and Lafiora HORNBACH Florapark GmbH. Due to exceptional charges, earnings for the Group as a whole did not match the growth in sales. The consolidated result from ordinary activities of c. 49 million was slightly down on the previous year ( 50 million). Earnings for the Group as a whole were impacted by the total write-off of our investment in the US retailer Dekor Inc., Atlanta, and loans to this company totalling 14.1 million. There were also start-up losses at HORNBACH Baustoff Union GmbH ( 4.9 million) and Lafiora HORNBACH Florapark GmbH ( 1.9 million). By contrast, the HORNBACH-Baumarkt-AG subgroup increased its contribution to the result from ordinary activities by almost 3% to nearly 44 million. The results of the HORNBACH Immobilien AG subgroup were also very satisfactory, with pre-tax results growing just under 60% to 22.5 million. It was not possible to offset fully the impact on results of the write-off of the Dekor investment and the start-up losses at HORNBACH Baustoff Union GmbH and Lafiora HORNBACH Florapark GmbH through income from sale and lease back transactions ( 17.5 million). In the 2001/2002 financial year a total of five DIY superstores and garden centers in the Group were sold and leased back on a long-term basis. The results of our foreign subsidiaries developed very well, with all the companies in the Netherlands, Austria, the Czech Republic and Luxembourg reporting a clear increase in results. In preparation for the entry into the Swiss market in 2002, the necessary personnel measures were taken and a separate administrative center established near Luzern. The performance of our subsidiary in the Czech Republic in the financial year 2001/2002 was particularly welcome, with not only the highest growth in like-for-like sales in the Group, but also the highest year-on-year increase in results. The Netherlands also reported very high growth in like-for-like sales, with a clear improvement in results. The three DIY superstores and garden centers here were supplemented by two standalone garden centers. Austria also repeated its strong performance, with two new HORNBACH DIY superstores and garden centers taking the total of large HORNBACH DIY superstores and garden centers in Austria to seven. The Luxembourg HORNBACH DIY superstore and garden center further improved on its strong results in previous years. The HORNBACH DIY superstores and garden centers in Germany performed well in the face of even tougher competition, and consolidated their earning power. Despite the difficult competitive environment generally, the gross margin in the financial year 2001/2002 was, essentially, maintained at 36.0% (previous year: 36.1%). Consolidated store costs increased to c. 418 million (previous year: 371 million). This represents a slight increase in the store costs as a percentage of net sales, rising from 27.5% to 28.0%. Administrative expenses also rose faster than sales. These include both operating and project-related costs, where the latter clearly have the nature of investment; both project-related and operating costs (e.g. purchasing) rose faster than sales. By contrast, economies were achieved in administrative costs for purely administrative activities. Project-related costs again included significant expenditure on IT, management training and staff TV. Administrative costs were also affected by the creation of separate administrative centers for the expanding units HORNBACH Baustoff Union, Lafiora HORNBACH Florapark and HORNBACH Baumarkt Schweiz. As a percentage of net sales, administrative costs overall rose from 4.1% to 4.4%. Costs incurred prior to opening new stores (pre-opening costs) rose only slightly in proportion to sales in the financial year 2001/2002, even though HORNBACH-Baumarkt-AG opened nine DIY superstores and garden centers and Lafiora HORNBACH Florapark GmbH opened its first prototype garden center. As a result, the ratio of pre-opening costs to net sales was unchanged at 1.1%. Consolidated net income for the year was 23.6 million, down on the previous year ( 27.1 million). Despite the lower rate of corporation tax in Germany and the increase in the contribution to results of subsidiaries in other European countries, the group tax ratio rose from around 46% in the previous year to 51%. This increase is essentially due to the fact that the write-off of the Dekor investment had to be treated as an amortization of a foreign investment which is not deductible for tax purposes. MANAGEMENT REPORT 11

16 Gross cash flow ( million) Earnings per share (DVFA presentation, adjusted for extraordinary items and income relating to other periods) dropped significantly from 2.58 to This significant decrease is due to the fact that the DVFA presentation omits the profit from sale and lease back transactions, while at the same time including in full the charge from the write-off of the Dekor investment. Consolidated gross cash flow, i.e. the result from ordinary activities plus scheduled depreciation of tangible assets, totalled c. 108 million, largely unchanged from the previous year ( 109 million). EBITDA, earnings from ordinary activities before interest, taxes, depreciation and amortization (Dekor), which is important for valuation by the capital market, is shown as 155 million, around 13% higher than the previous year ( 137 million). EBIT, earnings before interest and taxes, rose by 3.1% to c. 81 million (previous year: 79 million). Individual financial statements of the AG The individual financial statements of HORNBACH HOLDING AG, on the basis of which dividends are determined, are dominated by income from investments and profit transfer agreements and expenditure from assumption of losses. The investment result fell from 24.5 million in the previous year to 21.3 million. This comprises the unchanged cash dividend from HORNBACH-Baumarkt-AG ( 10.4 million) and profit transferred from HORNBACH Immobilien AG of 15.9 million (previous year: 13.0 million). It also includes the assumption of the net loss of HORNBACH Baustoff Union GmbH ( 5.0 million). Largely as a result of the write-off of the Dekor investment in the individual financial statements of HORNBACH HOLDING AG, net income of the AG fell from 13.7 million in the previous year to 0.6 million. The proposed unchanged dividend totalling 8.9 million accordingly had to be taken in part from reserves. Total assets of the AG fell by just under 12% to c. 129 million, largely as a result of the write-off of the Dekor investment. HORNBACH International successes In the financial year 2001/2002, HORNBACH was represented outside Germany in four other European countries, with 16 large DIY superstores and garden centers. The first HORNBACH stores in Switzerland will open in calendar year Currently, intensive preparations are under way for entering the Swedish market. As at the balance sheet date of February 28, 2002 there were HORNBACH DIY superstores and garden centers in Austria (7), the Netherlands (5), the Czech Republic (3) and Luxembourg (1), with a total sales area of c. 176,000 sq. m. (c.1,892,000 sq. ft.) and an average store area of 11,000 sq. m. (118,250 sq. ft.). The expansion into other European countries, started in 1996, has proved to be the right strategy. All the countries where HORNBACH has large DIY superstores and garden centers are making very valuable contributions to results. As the segment reporting of the HORNBACH-Baumarkt- AG Group shows, HORNBACH International reported net sales of million (previous year: million) in the past financial year 2001/2002, with a result from ordinary activities of 7.2 million (previous year: 8.9 million). The improvement in the results in the Netherlands and the Czech Republic was more than offset by the costs of entering the Swiss market and the preopening costs of the newly-opened stores in Austria. Adjusting for these effects, operating results improved by c. 2.3 million. This means that the subsidiaries in other European countries have further increased their importance as a source of earnings for the Group. The performance of the HORNBACH DIY superstores and garden centers in Austria was again very welcome, this made it logical to push ahead with expansion in Austria and open two more HORNBACH DIY superstores and garden centers in Graz and Wels. Further openings will follow in the financial year 2002/2003. In all, at the balance sheet date February 28, 2002 HORNBACH had seven large DIY superstores and garden centers in Austria with a total sales area of c. 81,000 sq. m. (870,750 sq. ft.). Among HORNBACH s European subsidiaries the past financial year 2001/2002 was very successful for the Netherlands, where the Netherlands subgroup under HORNBACH Holding B. V. almost broke even after deducting all administrative costs. The existing HORNBACH DIY superstores and garden centers in Zaandam (Amsterdam), Tilburg and Kerkrade reported some of the highest growth rates for sales in the Group. To strengthen expansion in the Netherlands, two stand-alone garden centers near Maastricht and Rotterdam were taken over in summer They continued to operate as garden centers, and it is planned to supplement them with large HORNBACH DIY superstores. In the current 2002/2003 financial year, the strategy of consistent expansion in the Netherlands will continue with the opening of up to three HORNBACH DIY superstores and garden centers. 12

17 As in previous years, the HORNBACH DIY superstore and garden center, which opened in Luxembourg in September 1998, has fully met expectations in both sales and earnings. The three HORNBACH DIY superstores and garden centers in the Czech Republic also reported very satisfactory growth, with double-digit increases in sales in all stores. This enabled the Czech Republic to post the biggest increase in results of all foreign subsidiaries, clearly topping expectations for the financial year 2001/2002. Investment in stores and infrastructure In the financial year 2001/2002, a total of c. 205 million (previous year: 173 million) was invested in the Group, mainly in real estate, buildings, equipment and fittings. As in previous years, investment was financed from cash flow available, long-term mortgages on land and buildings, and funds released by real estate sale and lease back transactions. Approximately 76% of capital investment was for new real estate, including advance payments and assets under construction, while c. 24% was provided for the replacement and expansion of operating and office equipment and for intangible assets (primarily computer software). The most important capital projects related to large DIY superstores and garden centers opened in the financial year 2001/2002 in Garbsen near Hannover, Erlangen, Ludwigsfelde near Berlin, Esslingen, Dresden, Graz, Wels and the two garden centers taken over in the Netherlands. The stores completed and opened in the financial year 2001/2002 in Graz and Wels (Austria) and Dresden and Esslingen were sold to real estate companies and rented back under long-term agreements. The Braunschweig store, which has been in existence since 1992, was also sold and leased back. These transactions generated book profits totalling 17.5 million, part of which ( 6.6 million) was tax-free. The sole purpose of the sale and rent back transactions is to release funds for financing future growth without incurring tax liability. The right to use the stores is secured in the long term, and rights to first refusal on leasing and purchase have been agreed. Solid balance sheet structure Consolidated shareholders equity totalled 366 million, compared to 353 million in the previous year. As consolidated total assets rose by 87 million to 1,209 million, the equity-assets ratio decreased slightly from 31.5% to 30.2%. Thanks to the sale and lease back transactions, it was possible to maintain the share of fixed assets in total assets at 62% or 751 million, despite investment totalling 205 million. Due largely to the increase in inventories in connection with new openings, current assets rose 7.6% to 456 million at the balance sheet date February 28, Payables amounted to 778 million as at February 28, 2002, compared with 710 million in the previous year. This item includes amounts due to banks of 591 million (previous year: 556 million). The cash flow statement, prepared according to international standards in the notes forming part of this report, gives a detailed overview of the financial activities (see page 40). Risk management Since May 1998, there has been a statutory requirement for members of the Boards of Management of public stock corporations to establish a risk management system (Section 91 (2) of the German Stock Corporation Act). The auditors of listed joint stock corporations are responsible for determining if the system is capable of performing its functions. Even before the coming into force of the new Act, the Board of Management of HORNBACH HOLDING AG committed itself to risk-awareness management which gives top priority to ensure the continuing existence of the company as a whole. For the sake of clarity, risk policy principles were adopted which are binding on all Group employees. Commercial success is inevitably associated with risk. However, no act or decision is allowed to put a company at risk. Entrepreneurial risks must be rewarded by an appropriate return on capital invested. The success of all our stores is evaluated here using the CFROA ratio (cash flow return on assets). Our aim is its steady improvement. Unavoidable risks, insofar as commercially acceptable, must be insured against. Residual risks must be managed using risk management techniques. MANAGEMENT REPORT 13

18 HORNBACH HOLDING AG consolidated balance sheet structure ( million) Assets 1,123 1,209 1,209 1,123 Shareholders equity and liabilities Cash and cash equivalents 65/88 Inventories, other receivables 361/370 Fixed assets 697/751 Feb. 28, 2001 Feb. 28, 2002 Feb. 28, 2002 Feb. 28, 2001 Short-term third party liabilities 355/280 Medium and longterm liabilities 488/490 Shareholders equity 366/353 The HORNBACH HOLDING AG Group has numerous instruments in place for risk early warning and monitoring. The Group accounting system is highly developed and enables detailed and prompt reporting. Consolidated balance sheets and income statements are generated monthly and submitted to the decision-making bodies. The reporting system is supplemented by informative key ratios, deviation analyses and comments from the Controlling Department; the latter was further expanded and its staff increased. Medium-term (five-year) corporate and financial planning was revised and fine-tuned, as the basis for operational annual budgeting. Corporate planning is drawn up carefully and in detail and is used to measure success in all divisions. Detailed deviation analysis is carried out monthly, with comparisons with budget and the previous year. Major investment decisions are taken on the basis of dynamic investment computations and sensitivity analyses. Investment relating to new locations is prepared on the basis of detailed market research. The Board of Management has issued targets for minimum rates of return on projects using the internal rate of return technique. Detailed financial budgets 12 months ahead are updated monthly. The Board of Management meets generally once a week. Significant investment and financing decisions are prepared for decision in the investment and financing committee. The Board of Management is informed regularly of progress on major IT investment projects. The internal audit department carries out regular audits at locations in Germany and abroad, and reports to the Board of Management. Euro launch successfully completed At the start of 2002, the euro became the sole legal tender in the Euro Zone. Thanks to careful, professional preparation, HORNBACH successfully implemented the euro as the sole legal tender in the countries involved (the Netherlands, Luxembourg, Austria and Germany). Systems were converted successfully in good time, and the staff involved in checkout procedures were given extensive training. All the logistic challenges in connection with getting the new coins and notes to the right places were also mastered. In fact, the replacement of former national currencies by the euro went faster than expected, and the transition periods proved longer than needed in all the countries involved. After only a few days or weeks in 2002 the euro had replaced the former currencies as legal tender. In contrast to original expectations, the exchange of the old currencies for the euro was handled over the bank counters rather than retail checkouts. As a result, the need for change was overestimated. This led at times to unusually high cash holdings in stores, but the situation has normalised since the beginning of the new financial year. Nearly 1,000 new jobs at HORNBACH Our successful growth is also reflected in the number of our employees. As at the balance sheet date February 28, 2001, there were 7,386 employees on permanent contracts with a company in the HORNBACH HOLDING AG Group; by the end of the financial year in February 2002, this number had risen to 8,173 in Germany and abroad. The number of employees rose from 5,770 to 6,196 in Germany and from 1,616 to 1,977 abroad. Averaged over the year, there were 7,025 (previous year: 6,343) full-time equivalent employees in the HORNBACH HOLDING AG Group. Average annual sales per employee (converted to full-time equivalents) decreased slightly from 247,000 to 14

19 246,000. Training has traditionally been given high priority at HORNBACH. This is reflected in the choice of eight possible vocational qualifications and the annual growth in the number of training positions. In the year under review, 570 (previous year: 495) young people were given training positions. Of these, the majority (254) are training for a qualification in retailing. We also continued with the development and training of our employees in the past year. Proposal for the appropriation of retained earnings HORNBACH HOLDING AG reported net income of 561, for the financial year 2001/2002. In addition, retained earnings of 115, were brought forward from the previous year. The Board of Management proposes transferring 8,250, from revenue reserves and appropriating retained earnings as follows: A dividend of 1.14 per share on 4,000,000 preference shares 4,560,000 A dividend of 1.08 per share on 4,000,000 ordinary shares 4,320,000 Dividend payments 8,880,000 To be carried forward 47, Important post balance sheet date events The start of the new financial year 2002/2003 was successful in terms of sales growth, with garden sales rising sharply in response to the spring temperatures in March. Sales of DIY products also benefited from the larger number of customers in the stores. Overall, like-for-like sales increased significantly in the first two months of the current financial year. In Switzerland, preparations continued as planned for opening the first HORNBACH DIY superstore and garden center in July HORNBACH Baustoff Union GmbH increased the number of stores to 10 by taking over the operations of a medium-sized builders merchant. The investment by Kingfisher plc of 12.5% in the subscribed capital, or 25% plus one share of voting capital, made necessary new elections for the shareholder representatives on the Supervisory Board. An extraordinary General Meeting was accordingly held on April 24, All the proposed candidates were elected to the Supervisory Board. Kingfisher plc is represented on the HORN- BACH HOLDING AG Supervisory Board by its Chief Executive, Sir Geoffrey Mulcahy, and its Group Finance Director, Helen Weir. Kingfisher plc is also represented on the HORNBACH-Baumarkt- AG Supervisory Board by William John Whiting, Chief Executive of the UK DIY chain B & Q. Other new members of the HORNBACH HOLDING AG Supervisory Board are Albert and Otmar Hornbach, who until October 2001 were long-standing members of the Board of Management. Opportunities and risks associated with the future; outlook According to the European Commission, the economy in the Euro Zone is gradually recovering in early However, improvement is expected to be only gradual. How far retailing will benefit from this remains uncertain. Retailing in general and sales in DIY stores in particular depend strongly on consumer confidence in the future, and in times of rising unemployment this is typically weak. The DIY store sector expects zero growth in like-for-like sales in 2002, following the decline in sales (3.5%) last year. As in previous years, the HORNBACH-Baumarkt-AG subgroup intends to outperform the industry as a whole, budgeting for growth in like-for-like sales in the financial year 2002/2003. We have taken into account here the difference in industry trend currently evident in northern and eastern Germany, on the one hand, and southern Germany, on the other. As a result, higher growth in like-for-like sales has been budgeted for our Southern Region than for the Northern Region (including eastern Germany). Clear growth in like-for-like sales is budgeted for the Netherlands and Luxembourg. In Austria and the Czech Republic, sales are expected to match the previous financial year. In the current financial year 2002/2003, up to 12 new HORNBACH DIY superstores and garden centers will open. For the first time in the company s history, there will be more new openings in a year outside Germany than inside. Up to eight new openings are planned in Austria (3), the Netherlands (2), Switzerland (2) and the Czech Republic (1). In Germany, our market leadership in the megastore sector will be emphasised by the opening of four more HORNBACH DIY superstores and garden centers. Intensive preparation is under way for entering the Swiss market, with the establishment of a domestic organisation. We are also continuing to invest heavily in the existing infrastructure. MANAGEMENT REPORT 15

20 HORNBACH Baustoff Union GmbH will continue to expand its network of regional builders merchants in the financial year 2002/ 2003 through individual acquisitions. The consolidation of administrative activities and exploitation of further synergies within the Group will improve cost ratios. Combined with growth in like-for-like sales, this is expected to lead to a significant reduction in start-up losses in the financial year 2002/2003. Lafiora HORNBACH Florapark is also budgeting significantly lower start-up losses, while HORNBACH Immobilien AG expects rising earnings. Overall, the result from ordinary activities in the HORNBACH HOLDING AG Group is expected to rise significantly, compared to the previous year. Based on current planning, (gross) sales will rise to around 2.0 billion. After deducting VAT, this leaves net sales of over 1.7 billion. Investments totalling some 233 million planned for 2002/2003 will be financed, as in the past, from the operating cash flow, long-term real estate loans and funds released through sale and lease back transactions. In contrast to the industry as a whole, HORNBACH is growing in the difficult economic environment. Competition will continue to intensify in Germany, with growing predatory competition. Private consumption will rise only slightly, if at all, and the construction sector will remain weak. Consumer confidence in the future is still insecure, as shown in continuing reluctance to invest in consumer durables and products for home and garden. The DIY industry and builders merchant sector in Germany are fiercely competitive. Consumers can choose from a large number of DIY superstores and garden centers of different sizes but with similar product ranges. Besides location, size and breadth and depth of product range, price has become a decisive competitive factor. The process of concentration will continue in Germany and at European level. Concepts which are not viable will disappear. Despite the tough competition, HORNBACH will pursue consistently its policy of expansion in Germany and abroad. Parallel to developing new regions, the market position in existing countries will be systematically consolidated. The rapid advance to become one of the leading European DIY store operators involves both opportunities and risks. Heavy investment is needed, and startup losses also have to be absorbed at times, but the new locations promise high sales growth and strengthen the market position. The continuing internationalization is increasingly reducing our dependence on consumer spending in Germany, thus spreading risks. HORNBACH is already one of the leaders among the European DIY store chains in terms of expertise and concept. We accordingly believe that we are ideally equipped for the challenges of the future. 16

21 Trading and real estate HORNBACH HOLDING AG is the parent company for all the Group s trading activities and real estate and development activities for all operating units. The core is the DIY superstores and garden centers, operated since 1968 by HORNBACH- Baumarkt-AG. In addition, the HOLDING Group operates stand-alone garden centers and professional builders merchant businesses, as well as supplementary marketing concepts. HORNBACH focuses all its activities on one large market; trading in construction, DIY and garden products. The market in Germany is estimated at around 100 billion, offering HORNBACH HOLDING AG ample potential for growth. In contrast to other trading groups which operate in a number of different markets, HORNBACH concentrates on a single product range, allowing it to benefit to an unusual extent from economies of scale and pooling of best practices between marketing concepts. German market volume: c. 100 billion Classic builders merchant business Other DIY Total market for construction, DIY and garden products DIY superstores and garden centers Builders specialist business Specialist garden stores TRADING AND REAL ESTATE 17

22 HORNBACH-Baumarkt-Aktiengesellschaft HORNBACH DIY superstore and garden center Berlin-Bohnsdorf With a share of consolidated sales now standing at 96.5%, HORNBACH-Baumarkt-AG is by far the biggest operating subsidiary in the HORNBACH Group. Despite the difficult environment, HORN- BACH has performed very well, boosting consolidated sales by 9.4% to 1,669 million in the year under review. Consolidated net sales increased to 1,437 million (previous year: 1,314 million). At the end of the financial year 2001/2002 the number of DIY superstores and garden centers in the Group had risen from 82 to 91, with a total sales area of 887,427 sq. m. (9,539,840 sq. ft.). The average sales area per store is now 9,752 sq. m. (102,448 sq. ft.). This impressively highlights HORNBACH s market leadership in the DIY megastore segment. At the balance sheet date there were 16 HORNBACH DIY superstores and garden centers outside Germany, in the Netherlands, Luxembourg, Austria and the Czech Republic. They reported gross sales of 376 million, representing just over 22% of consolidated sales. In the past financial year, HORNBACH has further improved its market position in the DIY superstore industry in Germany. In contrast to the decline in sales suffered by the industry as a whole in Germany in 2001, HORNBACH increased like-for-like sales by 1.4% (previous year: 2.5%). An important contribution 18

23 was made by the dynamic expansion of the HORNBACH DIY superstores and garden centers in the Netherlands, Austria, the Czech Republic and Luxembourg. HORNBACH has moved up a place in the sales league table of German DIY superstore and garden center operators every year for the past three years. Currently, the company is placed fourth. It is a sign of the superiority of the megastore concept typical of HORNBACH that the Group s steady expansion is the result in part of an increasing market share in Germany, rising from 4.9% in 1998 to over 6% currently. This has happened even though HORNBACH has by no means concentrated its growth efforts on Germany, but has in fact increased the share in sales of its foreign subsidiaries every year. Besides sales, the financial year 2001/2002 also saw growth in earnings, with a consolidated result from ordinary activities of 43.6 million, 2.7% up on the previous year ( 42.4 million). In view of the difficult competitive environment in Germany, growth in earnings is generally satisfactory. This was supported by very welcome growth in results in the foreign subsidiaries. Consequently, the Group will further increase the number of store openings in other European countries during the next few years. In the medium term, the share in sales of the international stores is planned to increase to 40%. Our entry into the Swiss market in summer 2002 is imminent. Up to eight of the 12 new openings planned for the current financial year are in Austria, the Netherlands, Switzerland and the Czech Republic. For the first time in the company s history, there will be more new openings in a year outside Germany than inside. In 2003, the first HORNBACH DIY superstores and garden centers are due to open in Sweden. Other countries are in preparation. HORNBACH is consistently looking for opportunities in new and growing markets. This is possible because the megastore concept which was constantly refined in Germany during the 80s also works outside Germany i.e. it is accepted by customers and valued as a synonym for selection, quality and competence in price and service. HORNBACH is able to implement the megastore concept, unchanged, in new countries. Even with only a few stores, HORNBACH is showing profits, and is achieving significant market shares right from the start. Our strategy abroad is a sweeping success, and the experience from operations in the individual countries is benefiting the whole organisation in the form of best practices. Another important boost to future growth can be expected from the investment in the parent company HORNBACH HOLDING AG by Europe s biggest DIY store operator, Kingfisher plc, London. The alliance with Kingfisher is an important step forward, helping with future expansion, giving us a strong and competent partner, and preserving HORNBACH s entrepreneurial independence. This is an alliance with common interests and great potential. At the operating level, highly promising links are being forged for international cooperation and exchange of best practices. For further information on the growth of HORNBACH-Baumarkt-AG in the financial year 2001/2002, see this subsidiary s detailed annual report. HORNBACH-BAUMARKT-AG 19

24 HORNBACH Baustoff Union GmbH HORNBACH Baustoff Union GmbH (HBU) consistently expanded the basis for its operations in the past financial year. Regional expansion continued as planned, and newly-acquired stores were quickly integrated. Currently, new concepts for supplying construction are being developed to improve market penetration. Progress is being made on developing the organisation to handle future growth. The market in which this emerging subgroup of HORNBACH HOLDING AG is operating is currently under enormous reorganization pressure. Housing completions in the new construction sector, which traditionally accounts for around half the business in construction materials, reached a new low in 2001 and Nobody predicted the scale of this recession at the start of the previous financial year. Housing completions in Germany in 2001 totalled 292,600, some 20% below the previous year and 42% below the level of The forecasts for 2002 are for a further decrease of c. 6% on 2001, to 274,400 units. A slight recovery is predicted from The renovation sector, which is the second major market in the classic builders merchant business, is also stagnating. HORNBACH Baustoff Union is expanding its regional presence under the umbrella brand Union Bauzentrum. In February 2002, HBU invested in a leading builders merchant business in the Saarland area, followed in March by the takeover of another builders merchant business. Growth through acquisition requires powerful systems able to operate at store level. This is the only way of ensuring the smooth and successful integration of new stores. This is why HBU con- 20

25 As part of its regional expansion, HORNBACH has invested in a Saarland builders merchant business in Ruhland-Kallenborn. tinued to focus in 2001/2002 on creating structures to ensure post merger management in the face of growing demands. At the start of the new financial year, a new and uniform logistics system was implemented in almost all stores, with a direct link to Group accounting. This tool, in combination with the modification of organisation and procedures in stores and administration, provides HORNBACH Baustoff Union with improved capability for operational and strategic management. Increasingly, HBU is succeeding in establishing specific marketing concepts in the course of its regional expansion. Plaster and roofing have already been successfully developed, tested on a small scale, and are now in roll-out solutions which may significantly expand the range of the classic builders merchant business. This strategic approach is being intensively pursued and expanded continuously to other segments. The subgroup s sales rose from 27.9 million in the previous year by around 50% to 42.1 million in 2001/2002. However, the acquisitions during the financial year mean that sales potential are significantly higher. Earnings bottomed out in the previous year: the fourth quarter saw a sharp drop in sales of the industry generally, and the overall margin shrank in the course of integrating new activities (specifically in key customer business and civil engineering) with lower margins. Results also suffered from the start-up costs involved in establishing and expanding the subgroup and the liquidation of decorama HORNBACH Fliesentechnik GmbH, which was no longer profitable. These factors led to a result from ordinary activities of -4.9 million in 2001/2002 (previous year: -3.4 million). Given the work that has gone into expansion, HBU is optimistic about attaining the sharp improvement in results budgeted for the current financial year. The strategies and concepts that have been developed are starting to bear fruit; economies of scale from consolidating volume in purchasing, and synergies from regional coverage achieved are all beginning to emerge in improved results. We stand by our goal of showing a profit in HORNBACH BAUSTOFF UNION GMBH 21

26 Lafiora HORNBACH Florapark GmbH Lafiora HORNBACH Florapark GmbH is active in the specialist garden store segment. Under the Lafiora umbrella brand, the subsidiary based in Neustadt a. d. Weinstrasse currently operates three stand-alone garden centers with an average sales area of 4,510 sq. m. (48,483 sq. ft.). Customers here benefit from a product range which is even deeper than in the garden departments of the HORNBACH megastores. The highlight of the past financial year and also the start of further branch expansion in this segment was the opening in October 2001 of the prototype Lafiora HORNBACH garden center & zoo at Germersheim am Rhein. Here, the company is testing a completely new marketing and adventure concept: some 40,000 articles connected with gardens, pets, aquaria, decoration, handicrafts, gifts and pictures are presented in an illuminated and sophisticated setting. The Lafiora concept includes an expanded range of indoor and outdoor plants, including specialities, and everything needed for a garden or balcony. 22

27 Lafiora HORNBACH Florapark GmbH faced a number of obstacles in the financial year. The greatest was the weather: the financial year started too wet and ended too cold, so that results fell short of expectations. Other reasons for this was the delay in opening the new Lafiora store and the sudden consumers reluctance to purchase after September 11. We now believe that the Germersheim location will take longer than originally planned to develop its strengths, with the help of some further refinements to the concept. An advertising campaign will establish Lafiora as an independent brand. Sales growth since the beginning of the financial year 2002/2003 has been very satisfactory. Lafiora has benefited here from the know-how transfer and economies of scale available in the HORNBACH Group. LAFIORA HORNBACH FLORAPARK GMBH 23

28 HORNBACH Immobilien AG Besides the trading activities in the subgroups HORNBACH-Baumarkt-AG and HORNBACH Baustoff Union GmbH and in Lafiora HORNBACH Florapark GmbH, the HORNBACH Group also has extensive real estate projects. These real estate activities are the result of the strategic decision that the Group should own the majority of its retailing locations. Over the years, a team has been built up of first-class specialists in property development. All requirements are expertly covered, from site location through the complex approval procedures to planning construction and contracting and monitoring building services, both nationally and internationally. This know-how accumulated over the years has become a decisive strategic competitive advantage to the HORNBACH Group. Up to the end of the financial year 2001/2002, our real estate specialists were employed at both HORNBACH Immobilien AG and HORNBACH-Baumarkt-AG. In the course of further optimization of our organization, the real estate staff were consolidated at HORNBACH HOLDING AG at the start of the new financial year 2002/2003. This means that HORNBACH HOLDING AG has become the central service provider for all real estate activities in the HORNBACH Group. As part of financing the rapid expansion of the network of DIY superstores and garden centers, a start was made several years ago on releasing funds through sale and lease back transactions. The funds released in this way have become an important source of financing for further growth in the HORNBACH Group. In the financial year 2001/ 2002, for example, a total of five HORNBACH DIY superstores and garden centers were sold to various real estate companies. Use as DIY superstores and garden centers was secured through long-term leases. Even taking into account the annual flow of sale and lease back transactions, the overriding strategy of owning the majority of operating locations has been maintained. At the balance sheet date February 28, 2002, for example, 595,000 sq. m. (6,396,250 sq. ft.), or c. 65% of the total retail sales area (901,000 sq. m. or 9,685,750 sq. ft.) was owned by Group companies. The remaining c. 35% of sales area is either leased from third parties (25%) or leased from third parties with a repurchase option (6%). In individual cases (4%) the property was leased under a hereditary tenancy. The sales area under Group ownership (65%) is divided between HORNBACH-Baumarkt- AG (34%) and HORNBACH Immobilien AG 24

29 The administrative offices of HORNBACH HOLDING AG at Neustadt an der Weinstrasse. The Group s real estate activities are managed from here. (31%). In the last few years, real estate activities have increasingly shifted to HORNBACH Immobilien AG. This is also evident from the investment in land and buildings, which totalled some 155 million for the Group as a whole in the financial year 2001/2002, or 76% of total investment ( 205 million). The operating subgroup HORNBACH-Baumarkt-AG accounts for less than half of this ( 76 million). At the balance sheet date February 28, 2002, HORNBACH Immobilien AG had leased 29 DIY superstores and garden centers with a sales area of c. 266,000 sq. m. (2,859,500 sq. ft.) to HORNBACH-Baumarkt-AG on long-term agreements and two garden centers with c. 7,700 sq. m. of sales area (82,775 sq. ft.) to Lafiora HORNBACH Florapark GmbH. HORNBACH Immobilien AG also has two builders merchant stores (8,044 sq. m. or 86,473 sq. ft.), on long-term leases to HORNBACH Baustoff Union GmbH. There is a control and profit transfer agreement between HORNBACH Immobilien AG and HORNBACH HOLDING AG under which, in the financial year 2001/2002, 15.9 million was transferred.

30 HZB HORNBACH Center Bornheim At the balance sheet date February 28, 2002, the subgroup HORNBACH-Baumarkt-AG operated a total of 91 DIY superstores and garden centers in Germany and abroad. Of these, 35 with a sales area of c. 314,000 sq. m. (3,375,500 sq. ft.) are owned by HORNBACH-Baumarkt-AG or one of its subsidiaries. As of February 28, 2002, HORNBACH Immobilien AG s property portfolio consisted of the following locations: Locations Sales area sq. ft. Dortmund 151,597 Ludwigshafen 135,740 Ludwigsfelde/Berlin 135,224 Bornheim 131,849 Velten/Berlin 127,183 Berlin-Bohnsdorf 125,313 Dresden-Kaditz 123,883 Leipzig 123,754 Wolfsburg 123,754 Hannover-Linden 118,981 Altwarmbüchen/Hannover 118,573 Straubing 116,745 Garbsen/Hannover 114,144 Wilhelmshaven 113,843 Frankfurt am Main 111,811 Pforzheim 111,564 Pirmasens 105,640 Worms 99,266 Darmstadt 86,882 Karlsruhe 83,065 Neu-Ulm 81,345 Kaiserslautern 80,002 Nürnberg, Fürther Straße 67,800 Rottweil 62,683 Sinsheim 43,677 Mannheim-Käfertal 42,989 Heidelberg 42,506 Mainz-Kastel 42,140 Mosbach 36,023 Union Bauzentrum Germersheim 44,699 Union Bauzentrum Bornheim 41,775 Lafiora Gartenmarkt Germersheim 46,945 Lafiora Gartenmarkt Neunkirchen 35,798 Fachmarktzentrum Bornheim 50,869 3,078,062 HORNBACH Immobilien AG is currently preparing or managing construction at the following locations: Opening in financial year 2002/2003 Its own general contractor: HORNBACH Immobilien AG develops almost all the retail properties itself for the Group operating companies. Picture: assembly work at store no. 91, Dresden-Prohlis Locations Planned sales area sq. ft. Krems 140,954 St. Pölten 127,936 Hohenems 115, ,872 26