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No respite in tough trading for Home Retail Group

Home Retail Group had a tough time over its first quarter and its second quarter results, due next week, are highly likely to show there has been no respite for the Argos and Homebase owner, according to UBS analysts.

In its curtain raiser for the group’s second quarter statement, due 8 September, UBS analysts are forecasting a hefty 11 per cent drop in like for like sales for Argos over the period, with gross margin down by 75 basis points.

For Homebase, UBS sees second quarter like for likes dropping 4 per cent, with margin off 25 basis points.

In June Home Retail Group posted disappointing first quarter to 28 May figures showing total sales fell 8.1% to £817m at the Argos catalogue stores due to difficult trading conditions over the period, with Homebase sales of £458m managing to stay just about in-line with the previous year.

In that June first quarter statement, Terry Duddy, chief executive of Home Retail Group, noted: "Trading conditions, particularly at Argos, have proved to be more difficult and volatile than anticipated.”

“At Homebase, the quarter represented a good outcome to its peak trading period reflecting the favourable weather, together with the strong execution of its seasonal offer.

Duddy added: "For Argos, the consumer electronics market represents a substantial proportion of its sales and has experienced a further significant decline. The difficulty of this market, together with the volatility of overall sales, has made the balance of the year more difficult to predict.

"While we remain cautious for the balance of the financial year, we are focused on our operational performance while continuing to invest across the businesses."

UBS analyst Andrew Hughes reckons there has been “no respite” for the group, especially for the Argos business, since that downbeat first quarter statement. Recent consumer and economic data from the likes of the British Retail Consortium and Office of National Statistics alone suggest tough times have been rolling on for Home Retail since then, he says.

Hughes believes consumer electronics weakness, which was a prime cause for Argos’ first quarter like-for-likes falling 9.6 per cent, has yet to alleviate.

And while Homebase saw a 1.6 per cent increase in first quarter like for likes thanks to some seasonal benefit, the analyst reckons the second quarter will have seen that unwind.

As a result his forecasts for the group remain under pressure. Hughes reckons Argos profit for the first half could fall close to break even, with group interim pretax profit dropping by around two thirds to £34 million.

With a potentially weaker than expected end to the second quarter, UBS has cut his full year pretax profit estimate by £10m to £140m, giving a new earnings per share for the period of 12.5pence.

As always, performance over the Christmas quarter by Argos remains key to underpinning of forecasts.

The broker rates Home Retail Group at ‘neutral’ but has now reduced its target price to 130p from 140p.

Home Retail looks cheap on a sum-of-parts basis but considering the potential downside risk to value and forecasts, UBS says it cannot rely on this measure for guidance. The broker’s price target remains set broadly at price-earnings parity with the wider sector.

Source : Kam Patel – Proactive Investors United Kingdom

02 September 2011
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Thank you for the excellent presentation that you gave at Woodbury Park on Thursday morning. It was very interesting and thought-provoking for our Retail members. The feedback has been excellent.

Martin Elliott. Chief Executive - Home Hardware.

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