GROUP MANAGEMENT REPORT

Outlook

The European DIY sector will continue to provide HORNBACH with growth opportunities in future as well. These are to be assessed in conjunction with the risks outlined in the risk report. Given the massive disruption to the global economy in the course of the financial and economic crisis, the macroeconomic framework has deteriorated significantly compared with the previous year. Major economies are attempting to counter the effects of the crisis with government economic stimulus programs. Consumer behavior is changing in response, a factor from which the DIY sector could nevertheless potentially stand to benefit. What’s more, the business performance of DIY and garden stores could be positively affected in the coming years by a series of sector-specific development trends (megatrends). Against this backdrop, we are consistently enhancing our corporate strategy, aiming to ensure continuity, reliability and sustainability, in order to make optimal use of potential opportunities for future growth.

Macroeconomic opportunities
Hardly a day went by in March 2009 without one forecast or another being corrected downwards. For the current year, the International Monetary Fund (IMF) has forecast that the global economy will shrink for the first time since World War Two. Global economic output is thus expected to decline by 0.5 % to 1.0 % in 2009. According to the IMF, the ongoing financial crisis has impacted far more severely on the overall economy than assumed even at the beginning of this year, when the Fund had still predicted slight growth of 0.5 %. Forecasts concerning developments in the industrial economies have been reduced correspondingly.

For the world’s largest economy, the USA, the IMF now expects GDP to decrease by 2.6 % in 2009 (previously: minus 1.6 %). For the euro area, the estimate was corrected downwards from minus 2.0 % to minus 3.2 %. The World Bank has also warned of a recession in the global economy this year and sees the drop in industrial output as the main reason for this development. Moreover, global trade threatens to decline more dramatically in 2009 than at any time since the end of World War Two. According to forecasts issued by the World Trade Organization (WTO), global trade volumes could drop by 9 % due to flagging demand in the context of the worst economic crisis for decades. Export-dependent economies will be affected particularly severely.

In the euro area, industry increasingly curtailed its production at the beginning of the year in response to ever more depleted order books. According to the Eurostat, output in January 2009 was 3.5 % down on December 2008 and 17.3 % lower than a year earlier. The sharpest reductions in production were seen at manufacturers of capital goods. Against this backdrop, economic experts expect real-term gross domestic product in the single currency area to have shrunk at least as fast in the first quarter of 2009 as in the previous quarter (minus 1.5 %).

Major industrial economies and some emerging economies have made efforts to cushion the crisis with extensive rescue measures for the financial sector, expansive monetary policies and economic stimulus programs born of necessity to attempt to stabilize the global economy once more. The economic stimulus programs in some cases include measures intended to improve household incomes directly, and thus to boost consumer demand. On an indirect level, infrastructure projects worth billions are intended to help improve employment levels and consumers’ disposable incomes. The European retail sector can therefore be expected to be affected less severely by the recession than other sectors. The uncertainty on the markets and downside macroeconomic risks nevertheless remain very substantial. The majority of research institutes and bank economists only see chances of a slight economic recovery from 2010 onwards.

The downturn in the global economy has hit Germany, the world’s largest exporter, especially hard. Based on assessments by economic experts, in 2009 the German economy will plunge into the deepest recession since the founding of the Federal Republic. The extent and duration of this downturn in macroeconomic output are as yet unclear. The more data which became available on the first months of the year, the bleaker economic researchers’ forecasts also became. Following repeated downward corrections, the estimates issued by research institutes and banks for 2009 recently settled down at between minus four and five percent. The forecast issued by Commerzbank in March, predicting a fall in gross domestic product of even six to seven percent, was especially gloomy. This pessimism is fed in particular by the sharp drop in industrial production. Having been severely hit by the collapse in new orders and exports in January, the manufacturing sector cut back its production by an unexpectedly high level of 7.5 % compared with the previous month.

By the spring, no turnaround was yet in sight in terms of the development in new orders in German industry. The labor market can therefore also not be expected to show any speedy recovery. Unemployment figures can rather be expected to track the development in GDP following a lag of several months. Government-subsidized short-time work has delayed the recession spilling over onto the labor market. According to forecasts, however, the expiry of short-time work in 2010 could be followed by a sharp rise in unemployment totals to well over four million. This factor increases the downside risk for domestic demand, which also cannot expect to receive any assistance from business investment in 2009.

Signs of hope were few and far between at the end of the first quarter of the calendar year. One small consolation in March was the surprising increase in the ZEW indicator of economic sentiment and in European procurement manager indices. The reduced rate of economic decline reflected in these figures meant that the prospect of the recession bottoming out in the second half of 2009 is now at least within the realm of the possible. According to the Ifo business climate index for the same month, the business climate may have fallen to the lowest level since the early eighties, but business expectations nevertheless improved for the third consecutive month. According to one rule of thumb, this provides an indication of a forthcoming economic turnaround.

Hopes that the German economy might stabilize as the year progresses are pinned on the Federal Government’s economic stimulus programs, falling interest rates and low commodity and consumer prices. Government investment and consumer spending can be expected to act as important anchors in this respect.

Sector-specific opportunities
The greatest uncertainty for 2009 and 2010 involves consumer spending. Many economic observers assume that private household consumer spending, which accounts for almost 60 % of German GDP and is traditionally not subject to any significant rates of change, could cushion, if not entirely avert, any downturn in the overall economy precisely because of its inertia. Unlike companies, consumers should not yet feel any major effects of the crisis during 2009. According to the GfK Group, the issue of unemployment is only expected to affect consumer spending towards the end of the year. In February, this Nuremberg-based consumer research company forecast consumer spending growth of up to 0.5 % in 2009.

Consumer sentiment has received support since the end of 2008 from the marked decline in inflation and substantial reduction in gas and energy prices. This has boosted purchasing power, which has also benefited from the pay rises agreed in the past year. Not only that, the government’s old car scrapping incentive program and the prospect of commuter tax relief repayments have also helped shield consumer confidence from the effects of the crisis. The GfK consumer confidence index thus brightened up slightly in March and also remained stable in April in spite of daily crisis reports.

In its forecast for 2009, the Association of German Retailers (HDE) expects retail sales to range between zero and minus 1 % in nominal terms. Adjusted for prices, that would be equivalent to growth of minus 1 % to 2 %. Given the bleak economic outlook, the German retail sector would thus post a creditable performance. According to HDE, the results are primarily dependent on developments on the labor market in the second half of the year.

The construction industry could play a key role in overcoming the recession in 2009. The financial crisis will only hit the construction sector in the medium term, as a backlog of nonresidential construction work from 2008 has cushioned the order situation. At the beginning of the year, the Germany's Central Construction Industry Association expected the recession in the overall economy only to reach the construction industry from the summer of 2009 onwards, following a stable first half to the year. Business construction sales are expected to decline by 5 % in nominal terms, while government construction and construction work on existing residential property should benefit from government economic stimulus programs. All in all, based on an optimistic assessment, sales in the main construction sector could match those in the previous year in nominal terms.

The extent to which the German DIY and garden store sector would be affected by macroeconomic developments in 2009 could not yet be foreseen at the beginning of the year. The first calendar quarter of 2009, for which no data was publicly available upon completion of this report, can be expected to have been characterized by a weak sales performance in February and March. The prolonged severe winter, which extended far into the spring, delayed the kick-off to the crucial spring season. The BHB sector association has underlined that it will be necessary to wait for the results of at least the first three months before any reliable forecast can be issued for the year as a whole, and has also pointed to the considerable degree of forecasting uncertainty due to the economic crisis. However, while other retail segments can expect to see falling sales, sector observers also see opportunities for growth at German DIY players – even in the crisis.

Capital resources and solid concept as decisive factors
Since the intensification in the financial crisis in 2008, there has been a marked increase in consolidation pressure within the DIY and garden store segment. Alongside the unrelentingly tough competition in terms of price and quality in the German DIY market, with its excess capacity, some players have now also witnessed a dramatic reduction in their financing options. Expansion and modernization projects have had to be scaled down or even cancelled for reasons of necessity, as have maintenance investments. This is particularly the case at players with thin equity cover, low liquidity, less competitive cost structures and conceptual deficits.

Thanks to our clear market position and the consistency with which we have continuously enhanced our large-scale retail format in Germany and abroad, we continue to see further growth potential in the German and European DIY market even in the more difficult economic climate. Based on our solid equity resources, high volume of company liquidity and broad and flexible financing portfolio, we are in a position to exploit expansion opportunities in a targeted manner and to invest in the future in spite of the turbulence on the international financial markets.

Exploit customer potential and structural advantages
Germany is the largest DIY market in Europe. In no other EU country do consumers spend more on DIY, home improvement and garden products. Its size alone makes the German DIY market interesting. However, the challenge facing players in the market is that German DIY and home improvement stores have not yet fully exhausted their customer potential. In Germany, this distribution channel covers less than half of the estimated DIY market volume. Unlike in the UK and France, the majority of DIY products are purchased in specialist retail stores, at builders’ merchants outlets or via other distribution channels. This indicates that there is potential for DIY stores if they succeed in gaining further market share from competing sales formats by offering appropriate customer focus and concepts. With our large-scale concept, which enables us to compete on equal terms with established specialist retailers, we believe that we are well positioned in this respect.

One general problem relates to excess surface capacity in the densely occupied German market. However, the question of overcapacity has to be viewed from a variety of angles. Much depends on competitive conditions in the respective catchment areas. On a local and regional level within Germany, there are still conurbations with below-average coverage with DIY stores and garden centers. We are exploiting these “gaps” to achieve selective growth. Within the respective local competitive situation, we are able to draw on our structural advantages and benefits of scale, factors reflected in particular in the attractiveness of our locations and the highest surface productivity of any leading German DIY store operator. Taken together with the largest average store size in Europe, this means that HORNBACH has enormous crowding-out potential.

Renewed focus on house and garden
Past experience shows that people are more prone to withdraw into their own private spheres in times of uncertainty (cocooning). Consumers pay greater attention to their own four walls once again and are willing to invest in embellishing and equipping their homes. Home improvement and the pleasure consumers derive from designing their own living space is becoming ever more popular as a leisure activity. Market researchers agree that the garden market will be among the more dynamic sectors of the economy in future as well. Consumers accord great importance to gardening and designing open-air spaces adjacent to their homes. According to studies performed by BBE Retail Experts, the garden market has returned to its growth course once again following several weaker years. The market volume is expected to grow by four percent in the period from 2009 to 2013. The DIY market stands to benefit from these developments. With its concept, HORNBACH focuses in particular on the needs of project customers, regardless of whether the projects involved relate to consumers’ houses, apartments or gardens.

Ray of hope in declining housing construction market
The number of building permits issued in Germany hit a new low in 2008. Compared with the previous year, 5.6 % fewer apartments were approved. Homes in detached and semidetached houses were especially hard hit, with downturns of 6.9 % and 6.0 % respectively. Consumers’ changing attitudes towards home ownership triggered by the economic crisis and demographic trends might nevertheless compensate for the declining trend in new housing construction at least in part.

In view of the massive destruction of value on the capital markets in the course of the financial and economic crisis, many investors have rethought their approach. In the hunt for safe havens for cash investments and retirement savings, owner-occupied property, in conjunction with the relevant government subsidies (“Wohn-Riester”), may well become increasingly attractive as a resilient asset. At the same time, based on estimates compiled by LBS Research, the total number of private households should continue to rise for at least the next ten to 15 years. The main reason stated for this development is the ongoing trend towards smaller households. Changing lifestyles are leading to higher numbers of singleperson households, especially among younger and middleaged members of the population. Increasing life expectancy is leading to further growth in the number of smaller-scale households among senior citizens as well. LBS estimates that one and two-person households will already account for 77 % of all households by 2020, five percentage points higher than in 2005. This could provide new construction activity with positive momentum, a development which could also generate increased demand for construction materials in the DIY sector.

Growth in the core business of modernization
Construction work on existing buildings (the modernization and renovation market) has become an ever more important factor in the business performance of DIY and garden stores in recent years. Since 1998, sales in the modernization market have exceeded new construction volumes. More than 70 % of the total construction volumes of almost € 130 billion now involve modernization projects, while new construction only accounts for just under 30 %. According to figures released by the market research company Heinze, construction volumes should remain stable through till 2020, as the modernization market will be able to make up for the loss of sales in the declining new construction business. This means that the DIY sector can justifiably expect to see a certain degree of stability in terms of construction investments, all the more so since experts view the modernization of residential property as being relatively crisis-immune. Notable growth drivers in this respect include the age structure of apartments and houses, building energy efficiency, senior-friendly renovation work and the positive impact of inheritance between generations.

	The age structure of apartments and houses in Germany indicates an increasing need for maintenance and modernization work. Of all apartments, 75 % are more than 30 years old, while only around 3 % have been built since 2000. According to a study by Dekra, almost one in three detached houses in Germany is in need of renovation. Half of the owner-occupied houses built between 1949 and 1960 have not yet been extensively renovated and do not meet current technology standards in terms of energy efficiency. Given that the property will decline in value unless renovation measures are undertaken, the need for construction services and products can be expected to increase. There is a great need for investment in heating technology and heat insulation. Merely to safeguard the utility value of owner-occupied properties via maintenance work, home owners would have to invest between € 5,000 and € 20,000 each, according to Dekra.
	The long-term increase in energy costs and climate protection mean that energy efficiency is increasingly gaining in significance. Energy-saving measures in and around the house enable energy consumption to be cut by up to 70 %. In the first economic stimulus package adopted at the beginning of December 2008, the Federal Government stocked up the CO2 building renovation program at the Kreditanstalt für Wiederaufbau (KfW) with a further three billion euros for the period 2009 to 2011. This KfW program enables homeowners to obtain low-interest loans or grants for environmentally-friendly investments in energy-saving measures in their houses and apartments. The Federal Ministry of Transport, Building and Urban Affairs drew a positive balance for the first two months of 2009. In spite of the crisis and the severe winter, more than 12,000 subsidy applications, corresponding to an investment volume of around € 1.2 billion, were approved – around 20 % more than in the equivalent period in the previous year. The improved tax deductibility of work performed by tradesmen has also provided an additional incentive for maintenance and modernization projects. These measures can be expected to benefit the DIY business, as many private building clients, professional housing companies and tradesmen will also cover their need for construction materials via the DIY sector.
	The gradual introduction of the energy pass starting in 2008 should also provide positive momentum for highperformance, service-driven DIY store operators. Following the entry into force of the Energy Saving Ordinance (EnEV), house owners have to present new tenants and owners with a pass concerning energy consumption levels at their property. The needs-based energy pass is obligatory for buildings with up to four apartments built before 1978. The pass provides tenants and buyers of apartments and houses with information on the condition of the building, oil or gas consumption levels, heat insulation and incentives for renovation. Individuals hoping to obtain support from state subsidy programs in future will be required to present their needs-based energy pass.
	In 30 years, around 7.5 million people in Germany, and thus almost twice as many as today, will be more than 80 years old. 23.7 million people in Germany will then be older than 65. Given these demographic developments, seniorfriendly construction involves the challenge of adapting existing living space to enable elderly people to retain their freedom and live independently in their familiar surroundings for as long as possible. Demand for senior-friendly construction solutions, such as barrier-free access to buildings and flats, the addition of elevators, and door-widening and sanitary conversion measures, will therefore continue to rise. The government promotes investments in seniorfriendly renovation work by offering KfW loans with subsidized interest rates. Additional funds of around € 240 million will be made available as part of the economic stimulus package for the period from 2009 to 2011.
	Experts estimate that assets totaling around € 3.3 trillion will be bequeathed between generations in Germany between 2009 and 2020. Almost half of all inheritances also involve property. The transfer of such property to the new generation in many cases also triggers a decision to undertake renovation work or refurbishment.

The modernization market, and in particular senior-friendly construction and investments in energy efficiency, will play an ever more important role for the DIY and garden store sector in future. With the competence of its range of products and services, HORNBACH has already prepared for this growth market at an early stage.

Opportunities offered by internationalization
Over and above the opportunities available in the German DIY market, the company’s expansion into other countries offers additional growth prospects. Numerous leading German DIY store players already took the decision to expand outside their own borders years ago. We continue to see promising growth opportunities for HORNBACH outside Germany. Since our market entry in Austria in 1996 and gradual expansion into eight further European countries, the like-for-like growth of our international business has averaged more than 5 % per year. In view of the increasing maturity of regional DIY markets, as well as of the negative impact of the global economic crisis on consumers, the annual rates of growth in coming years can be expected to fall short of this long-term average. We nevertheless still see potential for generating higher rates of sales growth abroad than in Germany. We believe that this is also the case for East European markets, which are suffering badly from the current recession due to their high degree of dependence on the international automobile industry in some cases, falling rates of foreign investment and inflation driven by exchange rate movements. The higher level of construction activity compared with Germany, a greater need to catch up in terms of renovation and modernization work, and widespread enthusiasm for home improvement provide our DIY megastores with garden centers in Eastern Europe with good prospects for long-term sales and earnings growth.

Not only that, the intensity of competition in the large DIY and home improvement store segment is considerably lower in some countries than in Germany or Austria. Thanks to their attractive product ranges and price structures, players operating DIY megastores with garden centers have in recent years successfully expanded their market share at the expense of small and medium-sized domestic retailers. The success of our business performance in Europe justifies our further international expansion and, by diversifying risks, will make us more independent of market conditions in Germany.

Strategic opportunities
Our aim is to continually expand HORNBACH’s position in the European DIY market by means of organic growth. Our sales and profitability are to be sustainably increased by expanding our internationally successful retail format. This involves focusing on the strategic enhancement of our concept and the expansion of our store network at locations with aboveaverage growth potential in Germany and abroad. Account will also be taken of the opportunities resulting from the changes in the underlying economic and sector conditions referred to above.

	The company’s strategy is focused on the concept of projects. HORNBACH is increasingly able to differentiate itself from its competitors with this approach, which is reflected in its product range, service and pricing policies. This unmistakable differentiation is necessary for the active promotion of the consolidation process, especially in Germany. Our solid financial resources, public corporate rating and the flexibility available to us in refinancing the business on the capital market will enable us to invest considerable sums in differentiating HORNBACH’s format in future as well. This factor is all the more important in the light of the financial and economic crisis. At the same time, we will be closely monitoring which corporate strategy options arise on account of the process of further consolidation in the DIY sector in Germany and on a European level.
	One unshakable component of our uniform strategy across the Group is our reliable permanent low price policy. We believe that we are better able to retain customers at HORNBACH in the long term by offering and guaranteeing the best market price on a permanent basis. In particular, our main target group of project customers, who often undertake large-scale renovation work, needs to be able to budget in the long term. This is hardly possible with temporary discount campaigns.
	DIY customers accord priority not only to competitive prices, but also to the quality of the products and advisory services on offer. By focusing on the quality of our product ranges and professional advice for all DIY and home improvement projects, we were able to boost customer demand significantly in the 2008/2009 financial year. We see our quality-driven concept as being confirmed by a representative survey commissioned by HORNBACH from forsa. According to this survey, advice from competent personnel and high quality goods play the decisive role for three quarters of the customers interviewed in their evaluation of DIY stores.
	We believe that we are excellently positioned in the sector with regard to the ever more important market for modernization and, within this market, with regard to the increasingly strict legal requirements governing the energy efficiency of buildings. We will continue in future to launch complex projects, such as the insulation of facades or the replacement of windows and doors, as “Project Shows” at the stores. The “Project Show” is an innovative marketing instrument aimed at intensifying the project concept. Presentations held in special event sections at the stores provide customers with specialist advice, information and suggestions as to how they can undertake renovation projects or realize their dream living space either under their own steam or with specialist support. These activities are to be extended to cover the entire building shell and will be accompanied by service packages from our tradesperson service. Moreover, considerable sales potential is also provided by public sector programs subsidizing the renovation of old properties in terms of energy efficiency or to make them senior-friendly. In view of this, we offer an extensive database on our homepage (www.hornbach.de) enabling customers to research subsidy programs provided on federal, state and district levels, as well as by energy supply companies. The public sector subsidizes new construction projects and the renovation of existing building stock, as well as projects relating to listed buildings and ensembles.
	We see the Buy-it-yourself (BIY) or Do-it-for-me market segment as harboring promising growth potential. This segment includes the target group of those customers who are on the lookout for solutions for their home improvement projects and who wish to purchase the product ranges themselves, but who then prefer to have the work undertaken by a specialist. We also view this market segment within the broader context of the ageing population in Germany and other parts of Europe. To tap this potential, we have, among other measures, extended our range of tradesperson services. It is possible, for example, to have an entire bathroom renovation or the fitting of doors, garage doors, or awnings conveniently handled with HORNBACH acting as the general contractor guaranteeing that the work is carried out on time, correctly and at the agreed fixed price, as well as assuming responsibility for the warranty.
	Furthermore, we are expanding our range of services, information and advice in order to attract new customer groups to HORNBACH. This range includes home improvement demonstrations at the stores intended to motivate customers to do it themselves, special workshops for women, and the targeted use of step-by-step displays. These measures are backed up by the promotion of skills on the part of the store personnel with the aim of achieving a further increase in product expertise and advisory competence, and thus in customer satisfaction. Our DIY megastores with garden centers are also increasingly of interest to professional customers. Generous opening hours, the stocking of large quantities, the rapid handling of purchases at our drive-in stores and builders’ merchant centers, and the uncomplicated acceptance of residual volumes no longer required make HORNBACH an attractive alternative to traditional retail or wholesale procurement sources.
	The exploitation of opportunities is not limited to further enhancing our concept or accessing market segments. We are also focusing on optimizing our operating processes. The processes involved in store organization, sales and the links to procurement and logistics are subject to a process of ongoing enhancement. This is expected to have a sustainable positive impact on the Group’s sales and earnings performance.
	We will press further ahead with internationalizing group procurement. Broad access to global procurement markets and our strategic, long-term partnership with suppliers and industry are of key significance in this respect. This partnership is of benefit to both sides. We provide each supplier with the opportunity of supplying all of our stores as efficiently as possible. Our ingenious logistics infrastructure plays the key role in this respect. Suppliers are able make large-scale logistical deliveries directly to each location, or to supply the merchandise indirectly via one of our three central logistics hubs, where large numbers of individual deliveries are pooled using the cross docking function. We thus also provide regional manufacturers with the opportunity of growing with HORNBACH outside their existing sales regions, i.e. of supplying goods to additional countries or to the entire Group should their capacity permit. The fact that our retail format is increasingly attracting professional customers to HORNBACH has enabled us to acquire production specialists who would otherwise only supply professional specialist retailers. The flexible dovetailing of our suppliers with the company’s logistics structures optimizes the value chain and secures a significant competitive advantage for us. The proximity of our suppliers to procurement structures in the individual countries enables us to optimally adapt our project-based product selection to regional requirements in those countries and to improve our margins due to benefits of scale. We are tapping further earnings potential by increasingly developing private labels in cooperation with partners. These provide our customers with attractive value for money, while at the same time differentiating us from the competition.

Outlook for the Group
The medium-term company planning has a budgeting horizon of five years and is updated and extrapolated annually. The basis for forecasting developments in the 2009/2010 to 2013/2014 financial years involves substantial uncertainties. These have intensified still further since the completion of the strategic planning process at the end of 2008 on account of increased downside macroeconomic risks. It is difficult to predict the short and medium-term implications of the global economic crisis on the sales, procurement and refinancing markets in those countries in which HORNBACH operates. The meaningfulness of forecasts is severely limited, as no past empirical figures are available to assess key aspects of the financial crisis and the chances of success for the state aid programs intended to counter the effects of the crisis. It is particularly difficult to predict whether, when and to what extent any possibly drastic reduction in employment will impact on consumer demand. We are reacting to these uncertainties by planning more defensively than in the past. Utmost priority is accorded to flexibility in managing the company and to safeguarding the liquidity and earnings power of the HORNBACH HOLDING AG Group.

Expansion
While our five-year planning was based on an average of seven new store openings per year in the past, in the 2009/2010 and 2011/2012 financial years we will be reducing the pace of our expansion in favor of maintaining a higher liquidity cushion and will be managing our investment planning on a short-term basis. This will enable us to cut back or postpone investments at short notice should our business performance fall short of our expectations. Assuming that the business performance remains within the range we expect, however, then we also aim to exploit financial scope for investments in the future. Alongside new store openings, this also includes store extensions and the acquisition of reserve land, for which the supply and purchase prices may in some cases be more attractive than in the past due to the financial crisis.

Only by the end of the budgeting horizon, i.e. in the 2012/2013 and 2013/2014 financial years, do we expect the macroeconomic framework to normalize. We then plan to open new stores at an average rate of seven a year once again. Depending on the progress made in the building permit and construction planning stages, store openings may be rescheduled between individual years. The majority of new stores are to be opened outside Germany. The HORNBACH Immobilien AG subgroup will continue to make a major contribution to the development of real estate within the framework of the expansion planned in Germany and abroad.

Two new HORNBACH DIY megastores with garden centers are due to be opened in the current 2009/2010 financial year. Both locations are abroad. Alongside our third store in Romania, which was opened in Brasov in March 2009 already, the opening of our fifth store in Switzerland is also planned. This DIY megastore with a garden center in Galgenen (Schwyz canton) is expected to commence sales at the end of 2009. Provided that sales and earnings expectations are met and that financing terms permit, HORNBACH plans to open up to five new stores outside Germany in the 2010/2011 financial year. One existing store is expected to be closed in the same year and should be replaced in the following year by the construction of a modern DIY megastore with a garden center. All in all, based on the expansion planned for the current and next financial years, the number of HORNBACH DIY megastores with garden centers across the Group is set to increase to up to 136 by February 28, 2011 (February 28, 2009: 129).

The HORNBACH Baustoff Union GmbH does not plan to make any amendments to its network of outlets.

Investments
Assuming that sales and earnings develop as expected, the gross investment volume budgeted for the HORNBACH HOLDING AG Group in the 2009/2010 and 2010/2011 financial years should exceed the level seen in 2008/2009 (€ 131 million). The overwhelming share of these funds will be channeled into building new stores, equipping new and existing stores, and acquiring land. Investments will mainly be financed by drawing on the free cash flow from operating activities, mortgage loans, and the funds released by sale and leaseback transactions.

Sales performance
The sales performance of the HORNBACH Group depends to a very great extent on the performance of the HORNBACH-Baumarkt- AG subgroup. We have based our forecast for the current and next financial years on the expectation that the rate of sales growth in those European countries in which we operate HORNBACH stores will slow compared with average rates of growth in the past. Consolidated sales growth will also be dampened by the deliberate reduction in the pace of expansion.

Accounting for the opportunities and risks involved in future developments outlined above, we nevertheless continue to believe that the HORNBACH-Baumarkt-AG subgroup has realistic prospects of generating sales growth over the twoyear forecast period both in Germany and in other European countries.

	In view of the robust consumer climate to date and given the measures cushioning developments on the labor market (catchwords: government-subsidized reduction in working hours and social security systems), we expect Germany to show less volatility overall than other countries in terms of its sales performance in the current financial year. Should positive macroeconomic forces gain the upper hand once again in the second half of 2009, then we expect to see further sales growth, also on a like-for-like basis. However, should the recession continue well into 2010, thus impairing the consumer climate more severely than expected, then the possibility of a reduction in like-for-like sales cannot be excluded. Irrespective of the given scenario, our strong market position makes us confident that our sales performance will continue to exceed average growth rates in the sector in future as well, enabling us to consistently increase our share of the German market.
	In other European countries, we aim to raise our sales from year to year, thus continually increasing the international share of sales at the HORNBACH-Baumarkt-AG subgroup (2008/2009: 41 %). At present, we see our sales performance as being more exposed to risks of fluctuation in other European countries than in Germany. This mainly involves those countries especially hard hit by the drastic downturn in production in the global automotive industry, such as Sweden, Slovakia and the Czech Republic. The economic crisis can be expected to leave its mark on these countries’ labor markets both earlier and more severely than in Germany. In some countries outside the euro area, such as Romania, private households’ income situation has been additionally burdened by rising prices due to significant depreciation in the respective national currency against the euro. Thanks to the distribution of risks across our European store network, we are able to compensate at least in part for reductions in sales in individual regions with above-average sales growth in other regions. Should the economy slide into an even more severe recession, then a downturn in like-for-like sales also has to be expected at the international stores.

We expect net sales at the HORNBACH-Baumarkt-AG subgroup, i.e. net sales including newly opened stores, to show growth in a low to medium single-digit percentage range in the current 2009/2010 financial year and to exceed this figure in the 2010/2011 financial year.

Sales at the HORNBACH Baustoff Union GmbH subgroup are also expected to continue to outperform the sector in the 2009/2010 and 2010/2011 financial years and to show year-on- year growth in each case.

On the level of the overall HORNBACH HOLDING AG Group, we also expect consolidated sales to show growth in a low to medium single-digit percentage range in the 2009/2010 financial year and to exceed this figure in the subsequent 2010/2010 financial year.

Earnings performance
Given the macroeconomic imponderables, it is not possible to formulate any specific earnings forecast for the current and next financial years. We will therefore conclude this report by providing some indications for the business segments, namely “DIY stores”, “Builders’ Merchant” and “Real estate”. These form the basis for the future earnings performance of the overall Group.

	The development in operating earnings in the DIY store segment is crucially dependent on the as yet unforeseeable rate of change in like-for-like sales. Based on our expectations, the gross margin should remain stable over the twoyear forecast period. We expect to be able to balance out potential risks resulting from any intensification in price competition on the one hand by exploiting opportunities for lower prices on procurement markets due to macroeconomic and commodity-related factors, and changes in the product mix on the other hand. We aim to counter the risk of sales slowing due to macroeconomic factors by enhancing the productivity of our store operations and administration processes, i.e. by reducing store and administration expenses as a percentage of net sales. Pre-opening expenses will decrease as a percentage of sales in the 2009/2010 financial year due to the lower number of new store openings compared with the previous year and will then in all likelihood rise once again in the following 2010/2011 financial year.
	In the builder’s merchant segment, store and administration expenses are expected to decline as a proportion of sales due to improved operating processes and cost savings.
	The real estate segment includes the retail properties owned by the HORNBACH-Baumarkt-AG subgroup and by HORNBACH Immobilien AG, which are let or charged on at customary market conditions to the respective DIY megastores with garden centers within the Group. Furthermore, gains and losses incurred in connection with the operating land development business of the HORNBACH Immobilien AG subgroup are also reported in the real estate segment, as are gains and losses generated by sale and leaseback transactions.   On the level of the HORNBACH-Baumarkt-AG subgroup, we expect to see considerably lower earnings contributions from the real estate segment in 2009/2010. While disposal gains of around € 37 million were generated from real estate transactions in the 2008/2009 financial year, no significant disposal gains are budgeted for the current 2009/2010 financial year. Two sale and leaseback transactions are still outstanding in connection with the completion of the sale of a total package of five DIY store properties initiated in the previous year. Assuming that these are successfully completed in the current financial year, we expect to post disposal gains of around € 1 million. The predominant share of the budgeted inflow of funds of around € 52 million is to be reinvested into the construction of new stores owned by the HORNBACH-Baumarkt-AG subgroup.   No significant disposal gains from real estate transactions have been budgeted on the level of the HORNBACH Immobilien AG subgroup either in the 2009/2010 financial year. In 2008/2009, by contrast, we recorded disposal gains totaling around € 13 million from successful land development in Austria and the sale of land not required for operations.

Due mainly to the significantly lower earnings contribution from the real estate segment, the operating earnings (EBIT) of the overall HORNBACH HOLDING AG Group will decline in the current financial year (2009/2010) to a positive figure substantially lower than the earnings posted for the 2008/2009 financial year. Earnings in the 2010/2011 financial year are budgeted to exceed the previous year’s figure.

Since its IPO in 1987, the challenges involved in the future development of the HORNBACH Group have never been as great as they are in the current financial and economic crisis. The macroeconomic insecurity merely serves to raise the expectations we place in the continuous enhancement of our business model. To strengthen the earnings power of the overall Group on a sustainable basis, we aim to focus even more closely than in previous years on optimizing merchandise input costs, and on structuring the operating processes involved in our store operations, logistics and administration with the maximum possible degree of cost efficiency and customer focus. In this, we stand to benefit from, among other factors, the structural advantages of our DIY megastores with garden centers, our uniform systems landscape across Europe, and the competitive advantages offered by our international procurement organization.