2002
HORNBACH-Baumarkt-A k t i e n g e s e l l s c h a f t
A N N U A L R E P O R T
Company Profile
To Our Shareholders
The HORNBACH-Baumarkt Share
Financial Calendar
Corporate Governance
Group Structure
of HORNBACH-Baumarkt-AG
Group Management Report of HORNBACH-Baumarkt-AG
The HORNBACH Brand – a Genuine Success Story
Training and Development at HORNBACH
Executive Bodies
Report of the Supervisory Board
2002/2003 Consolidated Financial Statements
Income Statement Balance Sheet Cash Flow Statement Shareholders’ Equity Schedule
Notes on the Consolidated Financial Statements Segment Reporting
Auditors’ Report
HORNBACH DIY Megastores with Garden Centers
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No Upper LimitsThis year’s special section, which starts on Page 26 of this Annual Report, portrays the high level of commit-ment accorded by HORNBACH to the areas of training and personnel development. Training its employees plays a key role in the business model at HORNBACH. A sophisticated system of vocational training forms the foundation of this model. The Group is a job machine with superb opportunities for highly-motivated and performance-driven employees.
Oil for the Wheels
of Growth
Training and personnel development
play a key role in the long-term success
of the company.
Amounts shown in € m unless otherwise stated Change in
IAS HGB
2002/2003
financial year on 2002/2003 2001/2002 2000/2001 1999/2000 1998/1999 1997/1998 previous year
Sales and earnings figures
Net sales 13.1% 1,628 1,439 1,314 1,190 1,046 961
of which in other European countries 33.4% 424 317 266 213 140 68
Sales increase as % of net sales 13.1 9.5 10.5 13.7 8.9 15.1
Earnings before taxes and extraordinary expenses – 45.1% 25 46 42 36 33 52
as % of net sales 1.6 3.2 3.2 3.0 3.1 5.4
Net income for the year – 51.5% 14 30 23 15 31 33
as % of net sales 0.9 2.1 1.8 1.3 2.9 3.5
EBIT 1) – 28.6% 46 65 64 55 48 68
as % of net sales 2.8 4.5 4.2 4.0 4.0 6.2
EBITDA 2) –12.6% 103 118 114 106 95 112
as % of net sales 6.4 8.2 8.7 8.9 9.1 11.7
Gross margin as % of net sales 35.3 36.4 36.2 36.4 37.4 38.0
Store costs as % of net sales 28.9 29.1 28.5 28.9 29.3 28.2
Costs of central administration
as % of net sales 4.0 4.1 3.8 3.7 4.2 3.6
Pre-opening costs 99.8% 19 9 9 12 13 11
as % of net sales 1.1 0.6 0.7 1.0 1.2 1.2
Cash flow figures
Capital investments 16.3% 140 120 78 115 127 140
Gross cash flow3) –17.3% 83 100 93 87 80 97
Gross cash flow as % of net sales 5.1 6.9 7.1 7.3 7.6 10.0
Earnings potential4) – 7.4% 101 109 102 99 93 108
Earnings potential as % of net sales 6.2 7.6 7.8 8.3 8.9 11.2
Net cash flow5) –14.1% 72 83 74 66 78 78
as % of net sales 4.4 5.8 5.6 5.6 7.4 8.1
Dividend payments 0.0% 13.1 13.1 13.0 13.0 13.0 13.0
Balance sheet and financial figures
Balance sheet total 7.1% 1,093 1,020 840 789 698 671
Fixed assets 12.7% 664 589 465 480 420 377
Inventories 12.4% 363 323 278 262 208 178
Liquid funds – 53.5% 23 50 30 30 49 17
Shareholders’ equity – 0.1% 350 350 261 250 247 230
Shareholders’ equity
as % of balance sheet total 32.0 34.3 31.0 31.7 35.5 34.3
Inventory turnover frequency per year 3.1 3.0 3.2 3.2 3.4 3.7
Return on shareholders’ equity in %
– based on net income for year –51.9% 4.1 8.6 8.3 6.9 5.2 10.5
Store data
Number of stores 102 91 82 78 70 65
in Germany 78 75 70 67 62 62
in other European countries 24 16 12 11 8 3
Comparable store sales increase – in % 1.5 1.4 2.5 3.2 – 3.0 –1.4
Sales area, per BHB in m2 14.3% 1,014,685 887,427 791,429 733,267 637,231 552,856
Weighted average net sales per m2in € – 0.4% 1,699 1,705 1,729 1,745 1,746 1,829
Average size of store in m2 2.0% 9,948 9,752 9,652 9,401 9,103 8,505
Weighted average sales per store 16.9 16.6 16.7 16.4 15.9 15.6
Other information Employees – annual average –
in full-time equivalents 11.6% 7,512 6,733 6,122 5,494 4,926 4,529
Sales per employee in € thousand 1.4% 216 213 215 217 212 212
Number of shares 15,011,500 15,011,500 15,011,500 15,011,500 15,011,500 15,000,000
EBITDA per share –12.6% 6.89 7.88 7.60 7.09 6.35 7.48
Earnings per share in €6) – 51.8% 0.96 1.99 1.42 1.15 0.83 1.54
1) 2) 3)
Earnings before interest and taxes
Earnings before interest, taxes, depreciation and amortization Earnings before taxes and extraordinary expenses, plus depreciation
Gross cash flow, plus pre-opening costs Net income for the year, plus depreciation Prior to 2001/2002 financial year: DVFA/SG earnings 4)
5) 6)
Consolidated Balance Sheet Structure HORNBACH-Baumarkt-AG in € million Liquid funds 50/23 Inventories, trade receivables and other assets 373/391 Long-term assets 597/679 Short-term liabilities 406/329 Long-term liabilities 337/341 Shareholders’ equity 350/350 Assets 1,020 1,093 1,093 1,020 Liabilities
Earnings before interest, taxes,
depreciation and amortization (EBITDA) in € million ■HGB ■IFRS 110 100 90 80 70 60 50 40 30 20 10 0 1998
Earnings before taxes and extraordinary expenses in € million ■HGB ■IFRS 55 50 45 40 35 30 25 20 15 10 5 0 1999 1996/1997 1995/1996 1994/1995 1993/1994 835 744 653 535 29 – – – 12.1 13.9 22.2 23.7 30 44 51 49 3.6 5.9 7.8 9.3 11 20 24 22 1.3 2.7 3.7 4.2 41 49 50 48 4.3 5.7 6.6 7.9 90 84 84 67 10.7 11.3 12.8 12.5 38.0 37.6 38.3 37.6 30.1 28.4 27.6 25.1 3.4 3.0 2.9 2.9 15 11 10 7 1.8 1.4 1.6 1.4 124 110 124 83 79 80 85 68 9.4 10.7 13.0 12.8 94 90 96 76 11.2 12.1 14.6 14.1 60 56 58 41 7.2 7.5 8.9 7.7 13.0 13.0 13.0 10.4 578 521 428 305 326 256 182 94 149 123 107 79 58 132 132 126 209 212 204 191 36.2 40.7 47.8 62.4 3.9 4.1 4.4 4.6 7.2 10.8 14.8 23.4 60 53 48 40 58 53 48 40 2 – – – – 4.1 – 3.0 3.1 9.4 487,958 405,547 340,947 258,088 1,911 1,999 2,153 2,178 8,133 7,652 7,103 6,452 15.5 15.3 15.3 14.1 3,899 3,354 2,833 2,283 214 222 231 234 15,000,000 15,000,000 1,500,000 1,500,000 5.98 5.60 55.97 44.69 1.01 1.50 19.46 18.77 02.28.2002 02.28.2003 02.28.2003 02.28.2002 2001 2002 2000 1998 1999 2000 2001 2002
C O M P A N Y P R O F I L E
The HORNBACH Group is characterized by its ability to respond to the challenges of trading in DIY, home improvement and garden products and to set new standards in the process.
Since 1877, five generations of the Hornbach family have been active in almost all areas of the construction sector – in the building trade, as manufacturers of prefabricated components and since 1900 as builders merchants.
As one of the pioneers in Germany and Europe, HORNBACH opened its first DIY store in 1968 and combined it with a garden center – at its time unique in Europe. This combination has since developed to become a European standard today.
In the second half of the 80s, and especially since 1990, HORNBACH has added a new dimen-sion to the market with its concept of large DIY and home improvement megastores with garden centers. Today, an impressively presented range of around 50,000 top quality DIY and gardening articles is available to DIY customers in spacious stores and at permanently low prices. Well-trained, service-oriented employees make the customers the focus of their activities. As of February 28, 2003, HORNBACH-Baumarkt-AG was operating 102 DIY megastores with garden centers across Europe with an average sales area of 9,948 m2.
The consistent implementation of the com-pany’s concept, coupled with the high expectations it places in the quality of its locations, its stores, its product range and employees, have facilitated the dynamic growth witnessed by the company in recent years and form the basis for further expan-sion. HORNBACH is the market leader in Germany among operators of large DIY megastores with garden centers with sales areas in excess of 8,000 m2. With total sales of € 1,628bn in the
2002/2003 financial year, HORNBACH is also one of the top players in the market in terms of its overall sales.
Following the company’s successful entry into the Austrian market in August 1996, it has consistently pressed ahead with its expansion into neighboring European countries. Stores have subsequently been opened in the Netherlands, Luxembourg and the Czech Republic. The first two HORNBACH DIY megastores with garden centers in Switzerland were opened during the 2002/2003 financial year. Preparations are currently underway for entering the Swedish market. As of February 28, 2003, the company was operating a total of 24 DIY megastores with garden centers outside Germany. Its international share of sales will continue to grow in the future. Opportunities for growth within Germany will nevertheless also be pursued.
HORNBACH-Baumarkt-AG is a publicly listed stock corporation. The ordinary shares of the company (ISIN DE0006084403) are listed at the German stock exchange and have been admitted to the subsection of the official market involving additional admission obligations (the “Prime Standard”) and are consecutively listed in the SDAX. Some 80% of the ordinary shares of the company are held by HORNBACH HOLDING AG, while around 14.5% are owned by independent shareholders. The British retail group Kingfisher plc owned around 5.5% of the shares at the reporting date. 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Development of Sales HORNBACH DIY Megastores with Garden Centers
(net in € m)
Dear shareholders,
“No normal DIY store. No normal prices”. This slogan, which constitutes the core message of our latest advertising campaign, neatly summarizes what HORNBACH stands for. And if we were to add the phrase “no normal year” when looking back on the events of the 2002/2003 financial year, we would have found an adequate summary for a highly complex, difficult and in some respects unsatisfactory stage in the development of HORN-BACH-Baumarkt-AG. But we should also not forget to make fair mention of the positive aspects of this unusual year.
It was no normal year because the earnings forecast we made after the first three months turned out in the end to be inaccurate. We did manage to increase our sales, both in absolute terms and on a comparable basis, and to escape the negative trend in the DIY sector in Germany once more. In 2002/2003, however, the growth in sales and in sales areas came at the cost of earn-ings. That is the bad news. The good news is that HORNBACH did not simply lose money, but rather made deliberate investments in quality and in market share.
What happened exactly?
The previous year was one of the most difficult in decades for the German retail sector. Economic stagnation, rising unemployment and a lack of consumer confidence also badly affected the DIY and garden products segment. Same store sales in the DIY segment declined for the fourth consecu-tive year (minus 3.1%). The process of competiconsecu-tive crowding out focussed more than ever on prices, now denominated for the first time in Euros. The pressure continued to increase on competitors. None of this left HORNBACH entirely unaffected.
It was no normal year because consumers, not only in Germany, have probably never looked so critically at price tags as in 2002, feeling an irrepressible suspicion that the Euro conversion had not always been undertaken entirely fairly. Against this background, the subject of price leadership became more important than ever. We have fought hard for this goal. We did not raise the price of one single article in the course of the currency conversion. Quite the reverse. We con-sciously sacrificed percentage points in our gross margin, i.e. the gross profit as a percentage of net
sales. Across the entire product range offered by HORNBACH in Germany, the prices actually fell by an average of 4%. Current image analyses show that following its highly acclaimed advertising campaign HORNBACH has established itself as the price leader. In reality we have been the price leader for quite some time, but now we are also publicly perceived as such.
Why is that so important to us? We could keep our prices at a constant level, or even put them up once more – and then watch as disaf-fected customers desert us for cheaper competi-tors. We could also provide luring special offers or create havoc with short-term campaign pricing – until our customers only come for special offers. None of this forms part of our concept of long-term customer retention or a sustainable basis for ongoing sales and earnings growth.
Thanks to our 4% reduction in prices, our customers saved more than € 50 million in the past financial year – a gigantic customer retention scheme. No normal prices. This strategy plays a decisive role in complementing our competence with regards to our product range and our focus on project clients.
Price leadership and earnings growth are no contradiction. As soon as the lower gross margin has been more than offset by appropriate volumes, it is possible to generate handsome profits. With its megastore sales structure, HORNBACH is more predestined for this path than almost all of its competitors.
This said, the very difficult economic condi-tions of the past year, particularly in the fourth quarter, also showed us that we have not yet been able to harvest the fruits of our labors to the extent we had hoped for. In the first months of the current 2003/2004 financial year, however, the investments made in the margin have begun to pay off as planned. This has been facilitated, of course, by an improvement in procurement condi-tions due to our international size and not least by the rewarding cooperation with our British partner, Kingfisher plc, Europe’s largest DIY store operator. In this way, we have built up a not inconsid-erable strategic reserve in our margin, which we are also prepared to use in response to any aggres-sive pricing actions initiated by our competitors.
T O O U R S H A R E H O L D E R S
There was also another reason why 2002/2003 was no normal year. In the 125thyear
of its existence as a company, HORNBACH has never opened as many DIY megastores and garden centers as it did last year. In spite of all tribula-tions, we have adhered to our chosen strategy and consistently pushed forward our expansion – also in Germany, the most difficult DIY market in Europe.
The megastore success story
HORNBACH has by far the most homogenous store structure of all German DIY retail companies. With an average sales surface of almost 10,000 m2,
we are the unchallenged market leader in the segment of DIY megastores with garden centers. Rather than struggling to extend small sales areas, we can focus all our energies on multiplying our successful prototype. We therefore have a lead which can no longer be caught up on.
Which companies, apart from HORNBACH, are still reporting growth in Germany? While many competitors were forced to close unprofitable stores during the period under report, or to cut back on investments for new openings in Germany or even postpone them indefinitely in order to improve their earnings figures, HORNBACH started operations at three further megastores. We still see a great deal of growth potential in Germany and are therefore preparing the further expansion and concentration of our store network in the large conurbations.
HORNBACH DIY megastores with garden centers outperformed the sector once again in 2002. We were probably the only company among the top eight in Germany to be able to increase our same store sales (plus 1.2% during the calen-dar year). During the past financial year, HORN-BACH was able to expand its market share by more than a tenth from 6% to 6.7% and is about to become the third-largest DIY retailer in Ger-many.
At the same time, it should also be taken into account that we pressed ahead with our international expansion with unprecedented speed. Eight stores were opened outside Germany in one financial year – itself another record. Considerable investments were made in preparations for our entry into new markets. All this came at the cost of a large portion of our earnings, but it also constitutes a necessary precondition justified by our previous performance for value-driven growth and thereby for the creation of shareholder value. Following the notably successful opening of the first HORNBACH DIY megastores with garden centers in Switzerland, all attention in the current year is being directed to Sweden.
It was also no normal year, because in the previous hundred years Germany has never suf-fered a flooding catastrophe comparable to that of August 2002. HORNBACH was also badly affected and had to report damage worth millions in its income statement. The fact that the implications of the disaster for us were not even worse is attribut-able to the untiring commitment of our employees in the regions affected.
“No normal employees”
I would also like to express my thanks to all our other employees. The difficulties of the past finan-cial year presented them with a spefinan-cial challenge. The commitment shown by them deserves to be honored by a further addition to our bold advertis-ing slogan – “no normal employees”. They act as crucial oil for our wheels of growth. Under this heading, HORNBACH invests in the training of its employees to an extent which is unique in its sector. That in itself is sufficient reason to present more details in a special section of this report (Page 26 onwards).
And what can we expect of the 2003/2004 year? I am confident that once again it will be no normal year for HORNBACH-Baumarkt-AG, but this time we are starting the year with substantially more optimistic omens than last year.
Steffen Hornbach
Chairman of the Board of Management
0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
DIY Market Share of HORNBACH in Germany (Market share in %) 98 99 99 00 00 01 02 03 01 02
The HORNBACH-Baumarkt Share
In 2002, the international stock markets were characterized by considerable reductions in share prices across the board and by insecurity among investors. The shares of German stock corporations lost ground for the third consecutive year. In addition to the poor development shown by the economy, which led in some cases to a significant fall in earnings at a large number of companies, the prospect of military action in Iraq had an additional negative impact on the stock markets. During the period under report (03.01.2002 to 02.28.2003), the DAX fell by more than 50%. The MDAX dropped by 36% and the SDAX by 32% over the same period. The share of HORNBACH-Baumarkt-AG (ISIN DE0006084403) was not able to escape the effects of this unfavorable environ-ment, although it did perform better than the overall market. Its price declined by around 19% during the 2002/2003 financial year.
The closing price of the share of HORN-BACH-Baumarkt-AG in Xetra trading was € 20,23 on February 28, 2003 (previous year: € 25.10), simultaneously marking its annual low. At€ 30.00, the share reached its annual high for the period under report on August 19, 2002. In the course of the second half of the year it suffered a significant fall in value.
This development once again reflects the deterioration of the retail sector in Germany. The year 2002 was one of the most difficult years for the German retail sector in the post-war period. This constituted an additional burden for retail stocks. HORNBACH was once more able to counter the general trend in its sector and to increase its same store sales and win new market share in the DIY and garden store segment. The intense level of price competition nevertheless had an adverse impact on earnings during the
110 80 70 60 50 120 130 40
Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb
2002 2003
Source: Bloomberg 90
100
SDAX MDAX DAX
HORNBACH-Baumarkt-AG
Share price performance: March 1, 2002 to February 28, 2003
T H E H O R N B A C H - B A U M A R K T S H A R E
2002/2003 financial year. Over and above this, the costs of the company’s rapid expansion in Ger-many and abroad, as well as the extraordinary expenses resulting from the flooding catastrophe in August 2002 dragged down its earnings. Business developments at the Group therefore provided hardly any positive stimuli for its share perform-ance.
As part of our Investor Relations activities, we supplied our target groups of private and institutional investors in particular and the financial media with prompt information as to business developments at HORNBACH-Baumarkt-AG. In addition, quarterly reports, annual reports, press releases and further financial information were published in German and in English on the internet (www.hornbach.com).
At our Annual General Meeting, the Finan-cial Statements Press Conference, the DVFA Analysts’ Conferences and our discussions with investors in Germany and abroad, we used the dialogue as an opportunity to explain the business development of HORNBACH in the past year, as well as the Group’s further growth potential in a difficult industry environment.
The widespread dramatic fall in share prices on the stock markets, as well as the international banking and investment crisis, have resulted in the fact that many jobs in equity research departments at the banks have been cut. The ongoing analysis of stock corporations which are not listed in the DAX has therefore been sharply reduced since
2002. Unfortunately, this also had a negative impact on the coverage received by HORNBACH.
Organic Growth
By means of intensive communication with the capital markets, we aim to increase investors’ interest in HORNBACH once more, as well as the number of company studies. The beginning of the current financial year makes us confident that HORNBACH can quickly move on from the unsat-isfactory 2002/2003 year and return to its former earnings power. HORNBACH is clearly focussed on organic growth with its DIY megastores with
Key figures for the HORNBACH-Baumarkt-AG share (IAS)
2001/2002 2002/2003
Nominal value of share € 3.00 3.00
Dividend € 0.87 0.87
IFRS earnings per share € 1.99 0.96
Total dividend payment € 000s 13,060 13,060
Shareholders’ equity per share € 23.31 23.28
Market capitalization* € 000s 376,789 303,683
Share price (Xetra)* € 25.10 20.23
12-month high € 26.50 30.00
12-month low € 20.80 20.23
Shares issued Number 15,011,500 15,011,500
Price/earnings ratio* 12.6 21.1
garden centers across Europe. Its concept has proven itself to be internationally successful. The share of HORNBACH-Baumarkt-AG is a solid long-term investment with a high intrinsic value.
In the light of the new indexing system introduced by the German stock exchange, HORN-BACH-Baumarkt-AG was granted admittance to the Prime Standard (a subsection of the official market involving additional admission obligations) as of January 1, 2003. The company’s listing in the Prime Standard obliges it to fulfill a higher level of transparency requirements. The share is listed in the SDAX.
Some 80% of the shares in HORNBACH-Baumarkt-AG are held by its parent company, HORNBACH HOLDING AG, while around 14.5% are owned by independent shareholders. The British retail group Kingfisher plc, with which HORNBACH entered a strategic alliance at the end of 2001, acquired 5.5% of the ordinary shares in September 2002 and thus underlined its confi-dence in the retail concept of the HORNBACH Group, often described by experts as the “best in class”.
Financial Calendar
Financial Calendar for 2003
June 25, 2003 Financial Statements Press Conference DVFA Analysts’ Conference
Interim report as of May 31, 2003
August 28, 2003 Annual General Meeting in Frankfurt am Main Congress Center Messe Frankfurt (11.00 a.m.) September 25, 2003 Interim report as of August 31, 2003
C O R P O R A T E G O V E R N A N C E
Corporate Governance
The German Corporate Governance Codex com-mission appointed by the Federal Government presented the German Corporate Governance Codex (DCGK) on February 26, 2002. The Codex incorporates the principal legal requirements in respect of the management and supervision of German publicly listed stock corporations and contains nationally and internationally recognized standards of good and responsible corporate management. Furthermore, the Transparency and Disclosure Law (TransPuG) came into effect on July 25, 2002. In this context, Section 161 was added to the Stock Corporation Law (AktG), which requires the Board of Management and the Super-visory Board of publicly listed companies to make an annual statement outlining the extent to which the recommendations contained in the Codex have been complied with and which recommendations have not been applied. At their meeting on Octo-ber 23, 2002, the Board of Management and the Supervisory Board of HORNBACH-Baumarkt-AG submitted their statement in respect of the recom-mendations of the German Corporate Governance Codex governmental commission pursuant to Section 161 of Stock Corporation Law (AktG) and made this statement available to shareholders on the company’s homepage. The complete statement has been published on Page 9 of this report. Overall, HORNBACH-Baumarkt-AG has complied with the principal recommendations of the Codex, with a small number of exceptions.
The Supervisory Board
The Supervisory Board of HORNBACH-Baumarkt-AG consists of 12 members and, in line with the Law on Codetermination, includes equal numbers of shareholder and employee representatives. The shareholder representatives are elected by the Annual General Meeting and the employee repre-sentatives by the employees. In the event of a parity of votes in the Supervisory Board the Chair-man of the Supervisory Board shall have the decisive vote in the second round, should such renewed voting also produce a parity. The Supervi-sory Board monitors the management of the company and provides ongoing advice to the Board of Management. It appoints the members of the Board of Management, dismisses them and is
responsible for the conclusion of, amendments to and termination of contracts of employment with members of the Board of Management. Any measures proposed by the Board of Management which could have a fundamental impact on the net asset, financial or earnings situation of the com-pany require the prior consent of the Supervisory Board. The Code of Procedure of the Supervisory Board contains a catalogue of those transactions or measures requiring such consent. This list of transactions requiring consent may at any time be extended or reduced by resolution of the Supervi-sory Board.
The members of the Supervisory Board are exclusively obliged to safeguard the interests of the company. They are not dependent on any assignments or instructions. They may not pursue any personal interests when making decisions, neither may they exploit business opportunities available to the company for their personal benefit. The members of the Supervisory Board are obliged to disclose any conflicts of interest to the Chair-man of the Supervisory Board, in particular any such conflicts of interest arising due to their fulfil-ling any advisory, executive or supervisory role at customers, suppliers, lenders or other business partners of the company. Any conflicts of interest in relation to a member of the Supervisory Board which are substantial and not merely temporary shall result in a termination of the relevant Super-visory Board mandate. AdSuper-visory agreements and other service or work contracts to be concluded between a member of the Supervisory Board and the company require the prior consent of the Supervisory Board. The Code of Procedure for the Supervisory Board was passed on October 23, 2002. At its initial meeting on April 24, 2002, the newly elected Supervisory Board passed resolution establishing the following committees:
– Mediation committee – Personnel committee – Audit committee
The members of the respective committees are listed on page 38 of this report.
The Board of Management
The Board of Management of HORNBACH-Bau-markt-AG currently consists of five members and has a Chairman. The Board of Management of HORNBACH-Baumarkt-AG has a self-imposed Code of Procedure. Its members are jointly
respon-Joint Report of the Board of Management and the Supervisory Board of HORNBACH-Baumarkt-AG in respect of Corporate Governance
sible for the management of the company’s busi-ness. The Board of Management provides timely and comprehensive information to the Supervisory Board on a regular basis. This information includes all questions of relevance to the company in respect of planning, business development, the risk situation and risk management. Furthermore, it presents the group investment, financial and earnings budgets both for the forthcoming financial year and for the medium term (five years) to the Supervisory Board, in general at its final meeting of the financial year. The Chairman of the Board of Management provides immediate report to the Chairman of the Supervisory Board of any signifi-cant events which are of material relevance for any assessment of the situation and development of the company, as well as of its management. Trans-actions and measures requiring the consent of the Supervisory Board are presented to the Supervisory Board in good time. Members of the Board of Management are obliged to disclose any conflicts of interest to the Supervisory Board without delay and to inform the other members of the Board of Management of such conflicts. Members of the Board of Management may only pursue secondary occupations, in particular Supervisory Board man-dates outside the group, with the permission of the Chairman of the Supervisory Board.
The Annual General Meeting
The shareholders of HORNBACH-Baumarkt-AG exercise their rights at the Annual General Meeting and in particular their right to cast their votes. They are informed at regular intervals of all signifi-cant dates by means of the financial calendar published in the annual report, in the quarterly reports and on the homepage of the company. The Annual General Meeting is generally chaired by the Supervisory Board Chairman.
Compilation and Audit
of the Annual Financial Statements
The annual financial statements of the HORN-BACH-Baumarkt-AG Group have been compiled in accordance with international accounting standards (IAS) since the 2002/2003 financial year. The
annual financial statements of HORNBACH-Baumarkt-AG are compiled pursuant to the Ger-man Commercial Code (HGB). In line with legal requirements, the auditor is elected by the Annual General Meeting. The Audit Committee prepares the Supervisory Board proposal to the Annual General Meeting with regard to the auditor to be elected.
Transparency
The company’s shareholders, all capital market participants, financial analysts, shareholder associa-tions and the media are provided with up-to-date information at regular intervals with regard to the situation of the company and to any material alterations in its business situation. The internet constitutes the principal means of communication for such information.
The situation and results of HORNBACH-Baumarkt-AG are reported by means of: – Quarterly reports
– The annual report
– The annual financial results press conference – Telephone conferences
– Events with financial analysts in Germany and abroad.
The dates of relevance to the company’s regular financial reporting activities have been summarized in the financial calendar published on the internet at www.hornbach.com. In addition to these regular reporting activities, any facts arising at HORNBACH-Baumarkt-AG which are likely to have a significant influence on the price of the company’s share are announced in the form of ad hoc announcements. In accordance with Section 15a of the Securities Trading Law (WpHG) and Point 6.6 of the German Corporate Governance Codex, members of the Board of Management and the Supervisory Board of HORNBACH-Baumarkt-AG are required to disclose any purchase or sale of shares in HORNBACH-Baumarkt-AG. The disclo-sures received by HORNBACH-Baumarkt-AG relating to the period up to February 28, 2003 have been reported on Pages 77 and 79 of this report.
C O R P O R A T E G O V E R N A N C E
The Board of Management and the Supervisory Board of HORNBACH-Baumarkt-AG hereby declare in accordance with Section 161 of Stock Corporation Law (AktG) in connection with Section 15 of the Supplementary Law relating to Stock Corporation Law (AktG) that the recommendations of the “German Corporate Governance Codex” government commission have in principle been fulfilled. The following recommendations have, however, not been applied due to the considera-tions provided:
– Point 5.4.1 German Corporate Governance Codex (DCGK):
In Section 5.4.1. the Codex requires the setting of an age limit for members of the Supervisory Board. We deviate from this recommendation. With the election of the longstanding former members of the Board of Management, Albert and Otmar Hornbach, to the Supervisory Board, we have secured a great pool of experience and compe-tence for the benefit of the company. We should not wish to relinquish this valuable resource.
– Point 5.4.2 German Corporate Governance Codex (DCGK):
In Section 5.4.2 the Codex requires that no more than two former members of the Board of Man-agement should be members of the Supervisory Board. We deviate from this recommendation, since the election of Messrs. Albert, Albrecht and Otmar Hornbach means that three former mem-bers of the Board of Management of HORNBACH-Baumarkt-AG are already represented in the
Supervisory Board. In this respect, however, it should be acknowledged that Albrecht Hornbach is simultaneously Chairman of the Board of Manage-ment of HORNBACH HOLDING AG and thereby of the parent company. He therefore represents the interests of the majority shareholder in HORN-BACH-Baumarkt-AG.
– Point 7.1.2 German Corporate Governance Codex (DCGK):
In Section 7.1.2 the Codex requires that the con-solidated financial statements be available to the general public within 90 days of the end of the financial year and that the interim reports be published within 45 days of the end of the period under report. We shall be obliged to deviate from the recommendation to publish the consolidated financial statements within 90 days of the end of the financial year in respect of the statements for the year ending on February 28, 2003. As a result of the replacement of the existing financial report-ing system by SAP and the resultant organizational changes, it will not be possible to meet the target of publishing the consolidated financial statements within 90 days, i.e. by May 31, 2003. Following the successful introduction of SAP and implemen-tation of the resultant organizational changes, we nevertheless intend to meet this target for the consolidated financial statements as of February 28, 2004. The publication of quarterly reports within 45 days following the end of the period under report has, however, already been accom-plished.
Bornheim, November 27, 2002
HORNBACH-Baumarkt-Aktiengesellschaft
The Supervisory Board The Board of Management
Statement of the Board of Management and the Supervisory Board of
HORNBACH-Baumarkt-AG concerning the German Corporate Governance Codex
pursuant to Section 161 of Stock Corporation Law (AktG)
HORNBACH-Baumarkt-AG* Bornheim
78 DIY megastores with garden centers
in Germany HORNBACH International GmbH ** Bornheim HORNBACH Baumarkt GmbH Wiener Neudorf Austria HORNBACH Holding B.V. Amsterdam Netherlands HORNBACH Baumarkt CS spol s.r.o. Prague Czech Republic HORNBACH Baumarkt Luxemburg S. à. r. l. Bertrange Luxembourg Group Structure of HORNBACH-Baumarkt-AG
* plus further subsidiaries, as depicted in complete overview Status: February 28, 2003
provided on Page 49
** 24 DIY megastores with garden centers in other European countries
HORNBACH Baumarkt (Schweiz) AG Oberkirch Switzerland HORNBACH Byggmarknad AB Gothenburg Sweden HORNBACH Baumarkt SK spol s.r.o. Bratislava Slovakia
G R O U P M A N A G E M E N T R E P O R T
Sword of Damocles over the Global Economy
The moderate recovery of the world economy following the economic downturn in 2001 showed tangible signs of slowing down in Autumn 2002. In the group of the largest industrialized nations, it even began to falter. The first few months of 2003 have seen little change in the economic climate. The global economy was depressed in the Autumn principally due to the growing likelihood of war in the Middle East, which together with the trouble in Venezuela had led to a considerable increase in oil prices. This situation was exacerbated by the after-effects of the massive decline in share prices seen on international stock markets. The mood of consumers, companies and investors in the USA in particular, but also in Western Europe, deteriorated appreciably.
Furthermore, debt capital financing condi-tions in the industrialized nacondi-tions were less favor-able than indicated by the generally low interest rate levels, mainly as a result of high risk premi-ums. All these factors have their roots in a marked lack of trust and confidence, which has consider-ably weakened the growth impulses hoped for in 2003. The business expectations of companies may have brightened up recently in some industrialized nations, but consumer confidence nevertheless continues to decline. The growing insecurity on the financial markets with regard to the possible economic effects of the war in Iraq constituted an additional burden on share prices across the world in early 2003 and accelerated their decline. The possible economic effects of the war in Iraq on the global economy cannot yet be adequately
assessed. There are many signs that the sluggish-ness of the economy will last for longer than expected. At the end of the business year the Dow Jones was 26% down, the Euro-STOXX 42% down and the DAX even 54% down on their respective annual highs in March 2002.
Germany Marks Time
The German economy has been in a state of virtual stagnation for more than two years. Doubtlessly, one reason for this was the downturn in worldwide economic growth, particularly as Germany has an especially intensive connection to the international division of labor. Nevertheless, the current eco-nomic sluggishness is not merely attributable to cyclical factors, which would be quick to reverse. Home-made problems are coming to the fore to an
increasing extent, such as the lack of flexibility in the country’s employment markets, its high tax and contribution burden or the lack of incentives in its social security systems. Uncertainty as to future developments in economic policy has also con-tributed to the decline in confidence in Europe’s largest economy.
According to calculations published by the Federal Statistics Office, Germany’s gross domestic product grew by a mere 0.2% in 2002, following seasonal and working-day adjustments. Apart from the decline of minus 1.1% in 1993, this was the weakest level of economic growth reported since German reunification. Germany was therefore once again the worst performer in the Eurozone. Growth forecasts for 2002 issued at the end of 2001 ranged from 0.6% to 1.2%. The actual level of growth thus fell significantly short of even the lowest expectations.
The greatest obstacle to the overall develop-ment of the German economy in 2002 was the marked weakness of the investment climate. Investment in plant and equipment fell by 8.4% in real terms. The decline of 5.9% in real terms in capital spending on new construction following a similarly high minus figure in 2001 demonstrates that the construction industry was also not able to produce any growth stimuli. Private house con-struction figures also remained poor. There is growing confidence, however, that the situation will improve once more from 2004 onwards.
The reluctance of private households to consume further contributed to the low level of economic growth in 2002. Private consumption expenditure fell by 0.5%, its first fall in real terms since 1990. The savings rate increased from 10.1% in 2001 to 10.3%.
The increase in unemployment, which was almost halted in Summer 2002 due to a series of special factors, has increased unabated in recent months. While the unemployment rate was still 9.4% in October 2002, it had shot up to 11.3% by the end of February 2003. In February 2002, there had been around 410,000 people fewer registered as unemployed and the unemployment rate was 10.4%. At 9.0%, the unemployment rate in West Germany at the end of February 2003 was, as in previous years, considerably lower than the equivalent East German figure of 19.9%.
The construction sector and industry in general are primarily responsible for this develop-Anniversary and record
year: December 2002 saw the opening in Prague of a second location in the Czech capital, at the same time marking the 100th HORNBACH DIY megastore with a garden center. Eleven stores were opened during the financial year, of which a total of eight are outside Germany, making 2002/2003 a record year in the history of the company’s expansion.
ment. Employment in the services sector also failed to show any significant growth in comparison with the previous year. The retail, hotel and transport sectors in particular have witnessed unfavorable developments. The situation on the employment market has shown further deterioration in the first months of this year.
Given such omens, consumers have been noticeably reserved in their consumption expendi-ture. Studies undertaken by the Company for Consumer Research (GfK) in Nuremberg reveal that levels of confidence declined drastically at the end of 2002. Income expectations, which had temporarily improved in the Summer following the completion of the wages round, and economic expectations both remained clearly negative. The propensity to purchase, which was already at very low levels, deteriorated further. As a result, retail purchases were noticeably limited. Even the Christ-mas shopping season in December brought no change for the better.
The Association of German Retailers (HDE) characterized 2002 as being the worst year in post-war Germany. Its panel calculated a decline in sales amounting to 3.5% in nominal and 3.8% in real terms. Data published by the Federal Statistics Office, which unlike the Association of German Retailers also includes pharmacies and fuel sales in the retail sector, showed a decline of 2.0% in nominal and 2.3% in real terms in the sales of
German retailers during the 2002 calendar year in comparison with the previous year. The competi-tion to retain customers by means of pricing policy was unprecedentedly intensive and difficult. This in turn had a significant impact on earnings at retail companies and increased the pressure on all sides to press forward with cost reductions, store clo-sures and rationalization programs.
There does not seem to be any fundamental improvement in sight for the German retail sector. The drop in sales is attributable to the ongoing lack of consumer confidence, reflecting in turn the poor economic climate and increasing levels of unemployment. It is also an expression of the widespread frustration of the population with regard to the increase in taxes and contributions introduced at the beginning of 2003. Many con-sumers are reluctant to make any large purchases due to their worries about losing their job and their fear of a depletion of their income. In these cir-cumstances, it is hardly surprising that the non-food retail sector has seen a significant reduction in sales. Only the food sector, increasingly in the hands of the discounters, and the mail order sector, particularly its internet-based providers, have been able to escape the downwards trend.
G R O U P M A N A G E M E N T R E P O R T
Negative Trend in the Do-It-Yourself Sector
The German DIY and home improvement sector was also not able to escape the poor economic climate and general downturn in consumption. For the fourth year in succession there was a drop in like-for-like sales in the DIY segment, i.e. compa-rable store sales, excluding new openings. The Federal Association of German DIY and Specialist Construction and Garden Stores (BHB) announced a decline of 3.1% in same store sales during the 2002 calendar year, following a fall of 3.5% in the previous year. The growth in the volume of sales surfaces continued, if a little less dynamically than in the previous year. According to data published by the BHB, the total sales surfaces of all DIY and garden stores grew by 2.4% from 14.3m square meters to 14.65m square meters. This additional expansion did not, however, help to increase the overall sales in the sector in Germany. Sales at the current total of 3,110 DIY stores and garden centers with sales surfaces of at least 1,000 m2fell
by 0.6% to € 16.76bn. While there was an increase in sales in the product areas of paint, decorative articles, garden and camping equip-ment, the traditional DIY product range of tiles, tools and sanitation equipment saw a decline in sales of up to 5.8%. If the DIY stores with sales surfaces of less than 1,000 m2are included in the
definition of DIY stores and garden stores, the
overall market used as a basis for calculating the market share of all DIY stores and garden centers in Germany fell from € 21.32bn in the previous year to € 21.03bn (minus 1.4%) in 2002.
The figures published by the Federal Statis-tics Office for the broader sector, including other retail sales channels for DIY and home improve-ment products as well as household equipimprove-ment, show an even more drastic development. Accord-ing to these figures, cumulative sales in this sector between January and December 2002 fell by –7.7% in nominal and –8.3% in real terms.
HORNBACH Increases Consolidated Sales by 13.1%
Over the past financial year, HORNBACH-Bau-markt-AG succeeded once more in countering the negative trends in the sector and in improving its competitive position. Consolidated sales (excluding sales tax) rose by 13.1% from € 1,439m in the previous year to € 1,628m during the year under report.
Around 74% of the sales were generated at the German DIY megastores with garden centers of HORNBACH-Baumarkt-AG. Net sales rose by 7.3% to € 1,204m (previous year: € 1,122m). This in itself proves the relative strength of HORN-BACH in comparison with its competitors in Ger-many, the most difficult market in Europe for DIY,
HORNBACH DIY megastore with a garden center in Schwetzingen
home improvement and garden products. As of February 28, 2003, the total sales surface of all 78 German stores amounted to more than 746,000 m2, resulting in an average German store size of
9,566 m2.
The 24 HORNBACH DIY megastores with garden centers in operation outside Germany at the reporting date, in the Netherlands, Luxem-bourg, Austria, the Czech Republic and Switzer-land, generated net sales amounting to € 424m (previous year: € 317m). Given that the sales of the international stores rose year on year by more than a third, their share of consolidated sales increased from 22% in the previous year to 26% in the year under report.
The first HORNBACH DIY megastore with a garden center in Switzerland was opened in July 2002 at Littau near Lucerne. The location at Etoy near Lausanne in the French-speaking part of the country was subsequently opened in February 2003. The performance of both stores has so far surpassed expectations.
At the end of the past financial year, the number of DIY megastores with garden centers operated by the Group exceeded one hundred. The number of stores rose during the year under report from 91 to 102. With total sales surfaces of
1,014,685 m2, the average sales surface per store
now amounts to 9,948 m2(previous year: 9,752
m2).
During the period under report, HORNBACH was also able to maintain its growth in same store sales. Excluding those of newly opened stores, sales improved by 1.5%, compared with 1.4% in the previous year. The course of business neverthe-less suffered some setbacks over the twelve months. Following a very promising start to the new season, like-for-like sales in May and June 2002 remained below the previous year’s figures. This was primarily due to the surprisingly strong reluctance of German consumers to make pur-chases, which in some cases led to two-figure declines in sales in the DIY sector. HORNBACH performed considerably better than the overall market, but was not entirely able to escape the general trend. A sharp rise in sales during the Summer months meant that the company was able to increase its same store sales by 2.0% across the Group in comparison with the previous year by the end of the first nine months of the reporting period.
In July 2002, HORNBACH celebrated its successful entry into the Swiss market with the opening of its megastore in Littau near Lucerne.
G R O U P M A N A G E M E N T R E P O R T
Investments in Market Share at Cost of Earnings
In contrast to sales, earnings showed unsatisfac-tory developments during the 2002/2003 financial year and remained significantly below the previous year’s figures. At € 25.4m, the consolidated earnings before taxes and extraordinary expenses reported in the annual financial statements com-piled for the first time in accordance with interna-tional accounting standards (IFRS) were 45% below the figure for the previous year (€ 46.3m). The deterioration in earnings was primarily attrib-utable to the development of the gross margin, pre-opening costs and start-up costs for the mar-ket launches in new countries (Switzerland, Swe-den).
Of primary significance for the reduction in earnings was the decline in the gross margin resulting from increasingly aggressive pricing policies for the market. The gross profit declined as a percentage of net sales (gross margin) from 36.4% to 35.3%.
The aims of providing the customer with the best price and ensuring permanent availability of the goods were focussed on more closely than ever during the 2002/2003 financial year. Ongoing investments were made in reinforcing the com-pany’s competitive position, in its branding and the expansion of its market share. As was apparent during the year as a whole and in the disappoint-ing final quarter in particular, the additional sales which would have been necessary to compensate for the lower gross margin across the Group by means of greater volumes did not arise due to the ongoing reluctance of consumers in Germany and Austria to make purchases. This led to a decline in the earnings power of the HORNBACH-Baumarkt-AG Group in the difficult competitive environment. Earnings could not be maintained within the approximate range seen in recent years. This did not just affect Germany. In Austria, where con-sumer confidence declined during 2002 following a long period of prosperity in the retail sector, earnings also came under considerable pressure.
HORNBACH avoided the temptation of improving its short-term earnings, which would have been possible by curtailing its expansion and neglecting the quality of its business model. This would have negatively affected the company’s sales and market share and would have marked the beginning of future earnings decline. The
Unsatisfactory Fourth Quarter
The fourth quarter (12.01.2002 to 02.28.2003) was overshadowed by the intensification of the Iraq crisis and increasing insecurity among con-sumers in Germany and Austria. In addition, the level of demand was negatively affected by the ongoing frost in January and February. Consoli-dated like-for-like sales in the final quarter remained stuck at the unsatisfactory level seen in the previous year (fourth quarter: minus 0.1%). Given the difficult economic climate in the Euro-zone, the positive overall development in sales during the year under report can be termed a success.
This is all the more impressive given that HORNBACH DIY megastores with garden centers in Dresden and Ansfelden near Linz (Austria) were affected by the flood catastrophe in August 2002 and had to remain closed for several weeks. For Austria, this meant the temporary loss of almost a fifth of its comparable sales surfaces, which had a noticeable impact on same store sales statistics.
Comparable Sales in Germany Positive in All Four Quarters
Nevertheless, developments in the individual countries show more reasons to be pleased than disappointed. The 1.5% increase in same store sales achieved for the overall financial year was partly due to the pleasing performance of the HORNBACH DIY megastores with garden centers in the Netherlands, the Czech Republic and Lux-embourg, where the existing stores reported two-figure sales growth in some cases. In contrast to the 2001/ 2002 financial year, moreover, the German DIY megastores with garden centers reported growth in same store sales for all four quarters and lay 1.8% above the previous year’s figure by the reporting date. This means that HORNBACH-Baumarkt-AG was strikingly able to counter the negative sector trend and to reinforce its position in the largest DIY market in Europe. As a result, the company was able to increase its share of the DIY and home improvement segment in Germany from 6.0% to 6.7%.
high level of administration costs in Switzerland, resulting from the cost of operating in that coun-try, are not balanced by initial pro-rata sales at the newly opened stores. In preparation for the entry into the Swedish market, investments have been made in the necessary personnel and organiza-tional structures. An independent administrative base has been established in Gothenburg. The company will only commence operations at the end of 2003.
Flood Damage Amounts to Millions
HORNBACH-Baumarkt-AG suffered considerable one-off charges on earnings during the 2002/2003 financial year. The flood catastrophe in parts of Germany and Austria in mid-August 2002 caused damage to buildings, goods, plant and office equip-ment amounting to a total of € 7.1m before tax. Given that HORNBACH had decided several years ago, having weighed up the respective costs and risks, against taking out insurance policies against so-called forces of nature, which include flooding, the costs thereby incurred had to be borne in full. The floods mainly affected the HORNBACH DIY megastores with garden centers in Ansfelden bei Linz in Upper Austria and one store in Dresden (Washingtonstrasse). The water reached a height of five foot (1.50m) in the stores. It was possible to evacuate customers and employees on time, so that nobody was injured. Thanks to the tireless efforts of our employees and other helpers, it was possible to limit the flood damage before the water broke into the affected regions. The clearing up operations in Ansfelden and Dresden required nine and five weeks respectively before the stores were com-pletely ready to open for sales once more. It was nevertheless possible to organize sales in tents and re-open sections of the store within several days. Lesser flood damage was ascertained in some other stores, but could be quickly remedied.
A special discount of 15% was granted for a period of four months in order to support the victims in the areas hit by the flooding. Further-more, HORNBACH stores in the regions affected offered special opening times to those members of the population taking precautions and organized large-scale sandbag campaigns, which involved procuring hundreds of thousands of sandbags and selling them at cost price.
Overall, consolidated earnings before taxes and extraordinary expenses fell by 45% to company rather remained faithful to its growth
strategy in 2002/2003: continuing its international expansion, increasing its customer focus and strengthening its long-term earnings power. A further reason for the deterioration in earnings was the sharp increase in pre-opening costs in comparison with the previous year. Follow-ing nine store openFollow-ings durFollow-ing the 2001/2002 financial year, eleven further HORNBACH mega-stores were opened during the year under report. For the first time in the history of the company, more stores were opened abroad than in Germany. These were at Krems, Hohenems and St. Pölten in Austria, Wateringen and Groningen in the Nether-lands, Littau and Etoy in Switzerland and the second HORNBACH megastore in Prague. In Germany, DIY megastores with garden centers were opened in Mönchengladbach, Bremen and Wiesbaden. The higher number of stores opened and the higher rate of expansion in countries with above-average prices (Switzerland and Sweden) resulted in a doubling of pre-opening costs from € 9.3m to € 18.5m. This cost category includes those costs arising prior to the opening of a new HORNBACH DIY megastore with a garden center. These mainly relate to personnel expenses, as well as operating and development costs. Pre-opening costs amounted to 1.14% of net sales (previous year: 0.65%).
Store costs grew more slowly than sales during the 2002/2003 financial year and amounted to € 470m (previous year: € 420m). They reduced as a percentage of net sales from 29.1% to 28.9%.
Administration costs across the Group also grew more slowly than sales during the 2002/2003 financial year. The cost ratio (as a percentage of net sales) declined from 4.1% to 4.0%. The admini-stration costs include both operating and project-related costs. The project-project-related administration costs are clearly of an investment nature and, together with the operating administration costs (e.g. procurement), rose as a proportion of sales. They include considerable expenditure relating to information technology, management training and the employee TV channel. In contrast, it was possible to achieve a significant decline in real administration costs relating to purely administra-tive activities, in spite of the inclusion of the start-up losses relating to the establishment of admini-strative structures in Switzerland and Sweden. The
G R O U P M A N A G E M E N T R E P O R T
€ 25.4m (previous year: € 46.3m). These include earnings amounting to € 7.1m from sale and rent-back transactions (previous year: € 5.2m). The return on sales before taxes and extraordinary expenses therefore reduced from 3.2% to 1.6%. The net income for the year of the HORNBACH-Baumarkt-AG Group dropped by 52% from € 29.9m to € 14.5m. The post-tax return on sales declined from 2.1% to 0.9%.
Earnings per share at the Group calculated in line with IFRS also reported a significant reduction from € 1.99 to € 0.96. The gross cash flow, i.e. consolidated earnings before taxes and extraordi-nary expenses plus depreciation, fell across the Group from € 100m in the previous year to € 83m. At € 103m, the EBITDA, an important key figure for the capital markets, was also down on the previous year’s figure of € 118m. Earnings before interest and taxes (EBIT) fell by 29% to € 46m (previous year: € 65m).
German Stores Hold Their Ground
The 78 stores operated by HORNBACH-Baumarkt-AG in Germany were well able to hold their ground in a very difficult climate in the sector during the 2002/2003 financial year and even managed to gain market share. In a market envi-ronment characterized by increasingly intense price competition, HORNBACH managed to establish itself, particularly with its project clients target group, as the price leader with the highest degree of competence with regard to its product range
and levels of service and was able to increase the number of its customers. With net sales of € 1,204m (previous year: € 1,122m), the German DIY megastores reported a significantly lower deterioration in earnings than the overall HORN-BACH-Baumarkt-AG Group. In contrast to most of its competitors, HORNBACH will continue to expand in Germany and establish a more closely-meshed network of stores in the large conurba-tions.
HORNBACH International
During the period under report, HORNBACH had operations in five other European countries with a total of 24 DIY megastores with garden centers. With eight new stores opened in the rest of Europe, there has never in the company’s history been a higher number of HORNBACH stores opened than in the 2002/2003 financial year. The first stores in Switzerland celebrated their pre-mieres. The market launch in Sweden is currently being vigorously prepared. The first store will open its doors to customers in Gothenburg in late 2003. Further countries will be included in the company’s expansion.
As of February 28, 2003, the company operated stores in Austria (10), the Netherlands (7), the Czech Republic (4), Switzerland (2) and Luxembourg (1) with a total sales surface of around 269,000 m2, which corresponds to an
average size of 11,200 m2per store.
The expansion into other European coun-tries, launched in 1996, spreads the company’s commercial risks, given that national market and economic cycles can be better offset in the course of time. It also provides growth opportunities in new national markets which are not yet so satu-rated. The 2002/2003 financial year saw important developments with regard to the competitiveness of the HORNBACH DIY megastores with garden centers located outside Germany. These are depicted in the segment reporting included in the notes to the financial statements.
With net sales of € 423.5m (previous year: € 317.4m), the HORNBACH International Sub-group achieved earnings before taxes and extraor-dinary expenses amounting to € 1.9m (previous year: € 13.8m) in the 2002/2003 financial year, following deduction of all administration costs. This figure reflects the increased speed of growth outside Germany. Pre-opening costs in this area
more than trebled compared with 2001/2002. There was also a fall in earnings in Austria, coupled with the costs of the forthcoming entry into the Swedish market, which more than compensated for the significant improvement in earnings in Luxembourg and the Czech Republic.
The HORNBACH DIY megastores with garden centers in Austria felt the effects of the increasingly difficult competitive climate during the 2002/2003 financial year. It became apparent that consumer confidence had declined, similar to the developments seen in Germany over several years. On top of that, there was a further intensification of competitive crowding out tendencies. Against this background it was not possible to maintain the very high level of sales and earnings seen in the previous year. While the 2001/2002 financial year saw the Austrian stores still making a considerable contribution to consolidated earnings, they man-aged to record a loss during the 2002/2003 finan-cial year. The doubling of the number of locations within two years, however, means that it will be possible to increase the pressure on competitors and to improve the future earnings situation in Austria. New HORNBACH megastores were opened in Krems, Hohenems and St. Pölten. There was a year-on-year increase in the number of locations from seven to ten and the sales surface rose by 44% to its current total of 117,000 m2.
This constitutes a remarkable level of growth and represents a challenge for the organizational structures in Austria. The aim was and still is to
increase the company’s market share as rapidly as possible and to optimize the widespread network of typical HORNBACH megastores. A further store will be opened in Leoben in June 2003.
The HORNBACH DIY megastores with garden centers in the Netherlands saw a deterio-ration in their earnings compared with the previous year. The main reason for this development was the increase in the costs for the rapid expansion and the disproportionate rise in store costs as a percentage of sales. Two further HORNBACH DIY megastores with garden centers were opened during the 2002/2003 financial year. At the report-ing date, the HORNBACH store network in the Netherlands consisted of seven stores with a total sales surface of more than 70,000 m2. The existing
HORNBACH DIY megastores with garden centers in Zaandam (Amsterdam), Tilburg and Kerkrade reported some of the highest growth rates in the whole Group. The course of expansion will be maintained in the 2003/2004 financial year with the opening of two DIY megastores.
The three existing HORNBACH DIY mega-stores with garden centers in the Czech Republic reported thoroughly positive developments. There was a significant increase in like-for-like sales. The operating income for the 2002/2003 financial year exceeded expectations by a clear margin. The first few months since the opening of the store in Prague-Repy, the second HORNBACH location in the Czech capital, in December 2002 have also produced promising results. At the same time, this marked the 100thopening of a combined
HORN-BACH DIY megastore with a garden center. Over-all, HORNBACH now has four locations in the Czech Republic with a total sales surface of 46,600 m2.
As in previous years, the HORNBACH DIY megastore with a garden center in Luxembourg was once more able to meet the high sales and earnings expectations placed in it. Its earnings contributions, which had been good in previous years, were able to be increased further.
The market launch in Switzerland, a par-ticularly challenging retail market, can be termed a great success. The stores in Littau near Lucerne and Etoy near Lausanne reported extremely promising sales developments from the very beginning. It is expected to be possible to reach break-even earlier than expected.
The second HORNBACH location in Switzerland was opened in Etoy near Lausanne in February 2003.
G R O U P M A N A G E M E N T R E P O R T
Investments in Markets and Infrastructure
A total of € 140m was invested by the HORN-BACH-Baumarkt-AG Group during the 2002/2003 financial year, mainly in land, buildings, plant and office equipment (previous year: € 120m). The investments requiring payment (€ 128m) were financed by the available cash flow, by long-term mortgage loans for land and buildings and by the disposal of real estate in the form of long-term sale and rent back agreements. Furthermore, additional funds amounting to around € 19m had been taken from group financing and short-term financial loans amounting to around € 69m had been taken up by the reporting date for the purpose of interim financing for real estate and the acquisition of shares. Following the opening of the respective locations over the next two years, the short-term liabilities will be replaced by long-term mortgage loans or sold in the form of sale and rent back transactions. Around 55% of the investment total related to new real estate, including advance payments and assets under construction.
Around 45% of the investment total involved the replacement and extension of plant and office equipment, as well as of intangible assets (primarily IT software). One major project involves investing in the forward-looking harmo-nization of the Group’s IT systems on the basis of SAP software. Considerable investments have been made in acquiring hardware, software licenses and advisory services. The introductory stage of SAP was begun during the 2002/2003 financial year and the SAP module is expected to go live during the 2004/2005 financial year. In addition, a
pre-liminary project relating to the replacement of the previous merchandising system by SAP Retail was initiated during the period under report.
The most significant investment projects during the 2002/2003 financial year related to the DIY megastores opened in Mönchengladbach, Bremen and Wiesbaden, as well as in Wateringen, Groningen, Prague, Littau and Etoy. The store to be opened in Leoben in June 2003 was sold to the real estate company of a large Austrian bank and rented back on a long-term basis. The transaction generated a tax-exempt accounting profit amount-ing to € 7.1m, including the profit from the de-consolidation of the respective real estate com-pany. The payment of the purchasing price will not be made until the 2003/2004 financial year. The sale and rent back transaction served to provide tax-exempt funds to finance the company’s further Above right:
With a sales area of around 13,000m2, the HORNBACH
DIY megastore with a garden center in Hohenems is the eleventh location of the company in Austria and also the largest in that country.
Below:
The network of stores in the Netherlands was expanded further during the period under report with the opening of stores in Groningen (picture) and in Wateringen.
expansion. The long-term rights of use as a DIY store have been secured. Furthermore, the rights of first refusal with regard to the letting out or sale of the real estate have been agreed.
Equity Ratio at 32 %
The consolidated balance sheet total rose year-on-year by around € 73m, or 7.1%, to € 1,093m. At around € 350m, the shareholders’ equity of the Group remained at approximately the same level as in the previous year. The equity ratio fell from 34.3% to 32.0%.
Mainly as a result of increased investments in land and buildings, fixed assets rose from € 589m to € 664m and therefore constituted 61% of the balance sheet total (previous year: 58%). This also reflects the rapid expansion of the Group in the past financial year.
Current assets fell by around 2% from € 423m to € 414m at the reporting date. Within this item, the increase in inventories caused by the expansion (plus € 40m) was balanced out by a repayment of receivables to affiliated companies (minus € 21m) and a decline of liquid funds (minus € 27m).
Liabilities including provisions amounted to around € 743m at the reporting date on
02.28.2003, compared with € 670m in the previ-ous year. This increase is primarily attributable to the € 60m rise in short-term liabilities to banks to € 124m. Total short-term liabilities amounted to € 406m (previous year: € 329m). Long-term liabilities fell from € 342m in the previous year to € 337m at the reporting date. This item includes deferred tax liabilities reported at € 43m (previous year: € 47m). A more detailed picture of the company’s financing activity is provided in the cash flow statement in the notes to the financial state-ments at the back of this report (please see Page 44).
Other financial liabilities increased from € 855.0m in the previous year to € 959.1m, mainly as a result of the renting of 7 new DIY megastores with garden centers.
Risk Management
Since May 1998, the boards of management of publicly listed stock corporations have been legally obliged to establish risk management systems. (Section 91, para. 2 of the German Stock Corpora-tion Act (AktG)). The auditors of publicly listed stock corporations are required to assess whether the system is capable of performing its task. The Board of Management of HORNBACH-Baumarkt-AG has always attached great importance to a risk-conscious corporate management which attributes the highest priority to the continued existence of the company. To provide clarity in this respect, binding risk policy principles have been set out for all group employees.
The achievement of economic profit neces-sarily involves the taking of risks. Nonetheless, no action or decision may entail any threat to the company’s continued existence. Entrepreneurial risks must be rewarded by an appropriate return on the capital committed. The performance of all stores is assessed on the basis of their CFROA figures, i.e. the cash flow in relation to the capital committed. The aim is to achieve ongoing improvements in this figure. Risks which cannot be avoided have to be insured against, to the extent that this is possible and economically expedient. Residual risks have to be controlled by means of a range of risk management instruments. A risk matrix is being compiled for this purpose for the first time in the course of the 2003/2004 financial year. The matrix includes all significant economic risks, their probabilities of occurring and their potential financial implications.
Furthermore, a wide variety of early warning risk recognition and risk monitoring instruments is employed within HORNBACH-Baumarkt-AG and its subsidiaries. The group accounting function is highly sophisticated and facilitates in-depth, up-to-date reporting. Consoliup-to-dated balance sheets and income statements are promptly compiled on a monthly basis and presented to the decision makers. The reporting activities are supplemented by relevant key figures, variance analyses and commentaries from the controlling department.
The medium-term corporate and financial planning is undertaken on an annual basis and facilitates the early recognition of risks to earnings and the company’s liquidity. It forms the basis for the annual operating budget. The annual operating budget is compiled with great care and in detail
