GROUP MANAGEMENT REPORT

Earnings Performance

As expected, the earnings of the HORNBACH HOLDING AG Group showed markedly disproportionate year-on-year growth compared with sales in the year under report. More than anything, this was due to increased earnings power in the DIY store segment. This in turn was primarily driven by like-for-like sales growth in Germany and abroad, coupled with a slight increase in the gross margin and improved cost efficiency at stores. Earnings in the builders’ merchant segment maintained their ground, virtually matching the previous year’s figure in spite of the difficult economic climate.

Furthermore, significant non-operating earnings growth in the real estate segment also contributed to the growth in earnings at the Group, thus contrasting with the non-operating charges on earnings reported in the real estate segment in the previous year.

Consistent with our forecast, the operating earnings (EBIT) of the HORNBACH HOLDING AG Group for the overall 2008/2009 financial year rose far more rapidly than consolidated sales, surging by 69.8 % to reach € 179.1 million (2007/2008: € 105.5 million).

Key Earnings Figures of the HORNBACH HOLDING AG Group

Gross margin
As in the previous year, the slight improvement in the gross margin had a beneficial impact on the earnings performance of the HORNBACH HOLDING AG Group. As a percentage of net sales, the gross profit rose from 35.7 % to 36.0 %. This pleasing development was chiefly due to improved procurement terms, which also accounted for the decline in global commodity prices since summer 2008. Moreover, we also benefited from the successful international procurement cooperation with our strategic partner Kingfisher plc. Furthermore, changes in the product mix resulting in a higher share of sales being generated with high-margin product ranges, and success in reducing theft and breakages also contributed to the increase in the gross margin.

Pre-opening, selling and store, general and administration expenses
Selling and store expenses, which declined as a percentage of sales, were reported at € 752.3 million in the overall 2008/2009 financial year (2007/2008: € 726.3 million). The store expense ratio decreased from 27.7 % to 27.3 %. Within this item, the store personnel expense ratio remained constant, while rental expenses rose on budget. General operating expenses, which also account for extra measures to optimize our merchandise presentation, rose in line with sales. Advertising expenses fell slightly as a proportion of net sales.

Pre-opening expenses, mainly involving personnel expenses, rose from € 7.2 million to € 8.8 million in the past year. This increase, which arose in spite of there being one new opening fewer than in the previous year (four, as against five), was due to the different timings of openings within the given financial years. Three of the five new store openings in the previous year took place in the first quarter of 2007/2008. Part of the related expansion costs were thus already incurred in 2006/2007. In the 2008/2009 financial year, by contrast, the store opening program only began three months later. At 0.3 %, pre-opening expenses remained virtually constant as a proportion of sales.

General and administration expenses at the overall Group rose from € 109.7 million to € 114.6 million. Among other factors, this increase was largely due to employee bonus payments, which are linked to the development in profits, the rollout of the merchandise system to our stores, which was continued in 2008/2009, and additional expansion-related expenses in Romania. As a proportion of net sales, however, the administration expense ratio remained constant at 4.2 %.

The personnel expenses included under selling and store, general and administration, and pre-opening expenses (including miscellaneous personnel expenses) rose by 6.0 % from € 427.3 million to € 452.7 million, thus increasing slightly as a proportion of sales. At € 73.4 million, depreciation and amortization of non-current assets was 2.8 % lower than the previous year’s figure (€ 75.5 million). This figure includes impairment losses of € 4.2 million (2007/2008: € 3.6 million), mainly relating to the potential relinquishment of a planned DIY store location, as well as to write-downs due to lower than expected proceeds on the sale of land no longer required for operations, and write-downs on other pieces of land no longer required for operations. Impairment losses are recognized under other income and expenses.

Other income and expenses
Other income and expenses jumped from € 14.4 million to € 65.0 million in the 2008/2009 financial year. This sharp increase was principally due to a net improvement in nonoperating earnings in the real estate segment by € 54.2 million. The non-operating result reached € 45.5 million. This mainly consisted of accounting profits from the disposal of three DIY store properties by way of sale and leaseback transactions, accounting profits from the sale of three real estate companies in Austria and of land not required for operations, amounting to € 50.4 million in total. These were countered by impairment losses on non-current assets (€ 4.2 million) and on non-current assets held for sale (€ 0.5 million). In the previous 2007/2008 financial year, by contrast, we reported net charges on earnings of € 8.7 million. These were mainly caused by impairment losses on real estate (€ 3.6 million), the costs of renovating one DIY store location (€ 3.0 million), disposal losses on an investment project not subject to further development, increased construction expenses for a store already opened, and other charges in connection with real estate development. The income from advertising expense grants included under other income and expenses fell from € 11.4 million to € 10.5 million in the 2008/2009 financial year.

Earnings at the HORNBACH HOLDING AG Group
We achieved significant improvements in all key earnings figures in the past financial year. The earnings before interest, taxes, depreciation and amortization (EBITDA) of the HORNBACH HOLDING AG Group surged by 38.8 % to € 251.2 million (2007/2008: € 181.0 million). The EBITDA margin thus rose (as a percentage of net sales) from 6.9 % to 9.1 %.

Operating earnings (EBIT) grew by 69.8 % to € 179.1 million (2007/2008: € 105.5 million). The EBIT margin improved from 4.0 % to 6.5 %. All business segments contributed to this substantial earnings growth. Operating earnings (EBIT) in the DIY store segment grew by 26.1 % to € 84.1 million (2007/2008: € 66.7 million). As a result, the EBIT margin in the DIY store segment increased from 2.7 % to 3.2 %. Operating earnings (EBIT) in the builders’ merchant segment, which portrays the activities of the HORNBACH Baustoff Union GmbH subgroup, increased from € 0.2 million to € 1.2 million. Due mainly to the earnings growth reported under other income and expenses, operating earnings (EBIT) in the real estate segment jumped from € 56.2 million to € 114.6 million (plus 103.9 %).

Net financial expenses improved from minus € 37.9 million in the previous year to minus € 34.8 million. This was chiefly due to significantly higher interest income (plus € 3.0 million). Moreover, net financial expenses also benefited from gains and losses from currency translation, which were reported under net financial expenses for the first time in the 2008/2009 financial year. Net gains from currency translation improved at the overall Group from minus € 3.6 million to minus € 0.8 million. Until the 2007/2008 financial year, this item was reported under other income and expenses. The previous year’s figures have been adjusted accordingly (please also see the explanations in (6) and (7) of the notes to the financial statements). Due to the marginally disproportionate improvement in net financial expenses, consolidated earnings before taxes rose more sharply than EBIT. EBT thus soared by 113.4 % to € 144.3 million (2007/2008: € 67.6 million), while the return on sales before taxes rose from 2.6 % to 5.2 %.

The consolidated net income of the HORNBACH HOLDING AG Group for the 2008/2009 financial year virtually doubled from € 58.3 million to € 112.9 million. The Group’s tax rate rose from 13.8 % to 21.8 %. It should be noted in this respect that we reported one-off tax income of € 13.3 million in the 2007/2008 financial year due to the revaluation of deferred tax assets and liabilities in connection with the German corporate income tax reform. In the year under report, the disposal gains on the real estate transactions outlined above were tax-exempt in some cases, thus reducing tax expenses by around € 8.9 million. Due mainly to this factor, the effective tax rate was below the expected average tax rate of 30 %. The return on sales after taxes grew from 2.2 % to 4.1 %. Earnings per share as per IFRS surged from € 5.97 to € 11.38 per ordinary share and from € 6.03 to € 11.44 per preference share.

Group Structure and Shareholders of HORNBACH HOLDING AG
as of February 28, 2009

Earnings contributions by subsidiary
Earnings at the HORNBACH-Baumarkt-AG subgroup exceeded the previous year’s figure by a considerable margin in the period under report. Operating earnings (EBIT) grew by 72.7 % to € 136.5 million (2007/2008: € 79.1 million).

We significantly improved the earnings performance of the HORNBACH Baustoff Union GmbH subgroup in the past financial year. Operating earnings (EBIT) grew from € 0.2 million to € 1.2 million. This pleasing earnings growth was mainly driven by sales growth, coupled with a reduction in store and administration expenses in absolute terms compared with the previous 2007/2008 financial year. This enabled us to clearly compensate for the slight decline in the gross margin.

The HORNBACH Immobilien subgroup increased its operating earnings (EBIT) by a substantial 53.8 % to € 46.7 million in the 2008/2009 financial year (2007/2008: € 30.4 million). This growth was primarily due to disposal gains on the sale of real estate (€ 13.1 million, as against € 0 million in 2007/2008) and to a year-on-year increase in rental income.

Earnings contributions by region
In the past 2008/2009 financial year we succeeded in increasing earnings contributions in absolute terms both in Germany and abroad. In terms of the geographical distribution, however, earnings contributions from Germany declined in percentage terms, while other European countries once again raised their share of earnings. Whereas the high international share of earnings in the 2007/2008 financial year had largely been due to the highly disparate sales performances in Germany and abroad, in the year under report it was the significant growth in earnings in the real estate segment which was mainly responsible for Germany’s share of earnings failing to increase in spite of the improvement in earnings in absolute figures. Moreover, the segment report also reflects the more dynamic like-for-like sales performance and higher profitability in other European countries.

EBITDA in Germany grew from € 90.0 million to € 98.2 million, equivalent to a 39 % share of the Group’s EBITDA (2007/2008: 50 %). EBIT in Germany improved from € 37.5 million to € 48.7 million. The domestic share of operating earnings thus decreased from 36 % to 27 %.

Earnings contributions from the international activities are pooled on the level of the HORNBACH International subgroup. As is apparent from the segment report, the absolute earnings contributions of the international business benefited from disposal gains in the real estate segment which were generated almost exclusively outside Germany (€ 50.4 million). At € 152.2 million (2007/2008: € 91.0 million), the EBITDA of the international business accounted for around 61 % (2007/2008: 50 %) of the EBITDA of the HORNBACH HOLDING AG Group in the period under report. The EBIT of the international business jumped from € 68.0 million to € 129.6 million, leading the international share of total EBIT to rise from 64 % to around 73 %.

If these figures are compared with the respective share of sales on the level of the overall HORNBACH HOLDING AG group (2008/2009: 39 %), the significance of the international HORNBACH stores for the Group’s earnings performance becomes apparent. At the same time, this also reflects the success of the Group’s international expansion strategy. HORNBACH has succeeded in rolling out its unmistakable retail format, which relies in particular on top-quality employee training and thus also on advising customers, in a wide variety of country markets and has gradually acquired market share.

In Austria, our HORNBACH DIY megastores with garden centers managed to maintain sales at the previous year’s level in a hotly contested competitive climate. Operating earnings improved compared with the previous year. There were no changes in the store network in the 2008/2009 financial year. We operated eleven HORNBACH DIY megastores with garden centers with total sales areas of 139,000 m² in Austria as of February 28, 2009.

Our DIY stores with garden centers in the Netherlands maintained their growth course in the 2008/2009 financial year. EBIT showed disproportionate growth compared with sales. Over the past ten years, HORNBACH has successfully established itself as a brand among Dutch DIY enthusiasts, being voted “best DIY store in the Netherlands” in a renowned consumer survey for the fourth year in succession in 2008. HORNBACH’s store network in the Netherlands comprised an unchanged total of eight stores with sales areas of 86,500 m² at the reporting date on February 28, 2009.

Our DIY megastore with a garden center in Bertrange in Luxembourg yet again managed to raise its sales in the past financial year. With sales areas in excess of 12,000 m², this, the country’s largest DIY store, positioned itself successfully in an intensely competitive environment.

The Czech Republic and Slovakia were among the fastestgrowing countries in HORNBACH’s European network in the first three quarters. In the fourth quarter, however, they were no longer able to match the high level of sales seen in previous years. This was due on the one hand to the same difficult seasonal factors which led to a negative like-for-like sales performance in most other HORNBACH regions as well in February 2009. On the other hand, consumer confidence in these countries, which have been hit particularly hard by the drastic reduction in capacity in the European automobile industry, weakened more markedly than in many other EU countries. For the year as whole, however, these two countries, which are managed as a single region in operating terms, nevertheless posted sales growth and an increased EBIT margin. This is due to the great popularity enjoyed by our DIY megastores with garden centers, which have also successfully poached market share from traditional specialist retailers in the past. No new stores were opened in the year under report. The store network in the Czech Republic consists of six locations. In Slovakia, we operated an unchanged total of two locations at the reporting date. Sales areas in the two countries amounted to more than 110,000 m² at the end of the financial year.

With the opening of a new store in Biel in November 2008, we extended our network of locations in Switzerland to four HORNBACH DIY megastores with garden centers with total sales areas of around 52,000 m² (2007/2008: 35,100 m²), while also increasing our net sales for the overall financial year. We are the absolute favorite for Swiss DIY enthusiasts, reaching top position for overall satisfaction for the second consecutive year in the Kundenmonitor Schweiz customer survey. We intend to build further on this success.

In Sweden, we opened our first location in the capital city of Stockholm in the past financial year and also significantly increased net sales at the total of three Swedish HORNBACH stores. We reported pleasing sales growth on a same-store basis, while the EBIT of existing stores showed markedly disproportionate growth compared with sales. The total sales areas of our stores in Sweden amounted to around 45,700 m² on February 28, 2009.

The dynamic growth seen in Romania was especially pleasing. In July 2008, we opened our second HORNBACH store in Bucharest with great success. Total sales areas in Romania amounted to around 30,500 m² at the end of the financial year. Great demand from customers for our extensive product range, our permanently low prices and professional advice led to high rates of growth in sales and EBIT. Having said this, the downturn in the economic climate due to the global economic crisis and resultant deterioration in consumer confidence in Romania have weighed on the sales performance of our HORNBACH stores there since the end of the 2008/2009 financial year. It remains to be seen how quickly the Romanian economy, greatly influenced by international investment as it is, will recover from the recession. In view of the substantial ongoing need to catch up in terms of new construction and renovation, however, we continue to see promising long-term growth potential in Romania.

Dividend proposal
The Board of Management and Supervisory Board of HORNBACH HOLDING AG will, as in the previous year, be proposing the distribution of a dividend of € 1.14 per preference share and of € 1.08 per ordinary share for approval by the Annual General Meeting on July 10, 2009. Due to the economic uncertainties resulting from the global recession, top priority is being accorded to safeguarding and ensuring the flexibility of our financial resources. We therefore deem it appropriate to uphold the long-term continuity of our dividend policy.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
(€ million)