Argos revealed its first like-for-like rise in five years this morning, however profits at its parent Home Retail slumped 10%. Retail Week takes a look at the analyst reaction
At present Argos’ digital offering is functional and lacks inspiration, particularly as the likes of Amazon and Tesco create ‘marketplace’ formats offering greater choice and price competitiveness. Indeed, as catalogues and stores become less relevant, Argos will find it more difficult to stay at front of mind in a crowded digital world. Similarly, if Argos is to avoid the margin eroding impact that online can have because of tougher price competition, it needs to have a differentiated and unique edge to its product mix.
Homebase has found itself stuck in a middle ground. Its large, ‘shed-like’ stores remain unappealing to home shoppers, whereas serious DIYers continue to prefer rivals Wickes and B&Q. Similarly Homebase has struggled to strike the right tone on price and quality; it lacks the value credentials of others, but is not seen as particularly premium either - Matt Piner, Research Director at Conlumino
Given the guidance at the pre-close, we were not expecting any surprises today and this has proved to be the case. PBT of £91m is a touch above consensus of £90m and in line with our forecast.
At the operating line, Argos and Homebase operating profit were a touch shy of consensus offset by a lower central activities cost. Bethany Hocking, Investec
For 2013/14 management expects consumer spending to continue to be impacted by ongoing inflation and low consumer confidence. Nevertheless management comments that it has the financial resources to invest in the Argos transformation plan (to become a digital retail leader) and roll out the new Homebase proposition (with 10 out of 336 store closures expected in 2013/14). As a reminder Home Retail is spending £175m in capex for three years and is targeting an average 5% LFL sales growth p/a at Argos and a 5% operating margin by FY18.
We think this is too ambitious, particularly in light of the -50bps structural gross margin hit at Argos that management has guided to and hence for FY13/14 we forecast Argos profitability will fall slightly to £95m (consensus estimates flat at £101m). We are more bullish on a UK housing market recovery and forecast Homebase profits will double to £24m (consensus estimates £16m) and thus overall we forecast a c.10% increase in FY14 PBT to £99m (consensus £101m) – Caroline Gulliver, Espirito Santo
Argos has performed better on the back of the demise of a major competitor – which has also helped to drive traffic into its stores – and soft comparables. Therefore, we wouldn’t get too carried away. Argos’s profits have fallen from £376m to £100m since FY2008, driven by a like-for-like sales decline of nearly 20%. Homebase’s profits are 24% of that achieved five years ago, whilst its two year like-for-like sales have fallen by nearly 10%.
Of course, Home Retail does have a plan for Argos (less so for Homebase), but it does not operate in a vacuum. Changing Argos is necessary, of course – and much of what it plans to do is ‘mom and apple pie’ - but the bottom line is that we don’t believe that it can become a ‘digital leader’ with 700 leasehold stores. As time marches by, one potential respite is that it has around 275 stores with lease renewals or break clauses due in the next five years. Overall, we think that there is too much for Argos to do, digital disruption will change everything in the next five years and that the competition is too fierce and nimble. Philip Dorgan, Panmure Gordon
We still believe it will be a challenge for the company to improve earnings even with a cyclical upturn. Argos sells to the ‘low end of the market’, does not have particularly strong own label brands, which currently account for 16% of sales, and in electricals (c.37% of sales) it is now heavily reliant for growth on low margin commodity items. In addition, the company is up against relatively difficult comparatives, in particular with the tablet category, and will soon approach the anniversary of Comet going into administration. Homebase also looks structurally challenged. Freddie George, Cantor Research
Argos is Home Retail Group’s white knight and is certainly forging a path to multi-channel success. The business is transforming itself from a catalogue merchant, to a strong online player. Argos’ click-and-collect model will offer customers the physical locations around the UK where they can collect orders and most importantly, receive advice from customer assistants – something that the retail giant, Amazon, cannot offer.
Home Retail Group may be able to replicate some of Argos’ online success with its sister chain, but in the short-term it would benefit from refocusing its broad offering to give the consumers greater clarity. Peter Saville, Zolfo Cooper