Homebase has outpaced Argos in terms of sales growth to drive parent company Home Retail’s group profits up 14%. This is what the analysts said.
“The company has strong cashflow, a relatively strong balance sheet with cash of over £300m and a low valuation. We still need to be convinced, however, that the recent Argos initiatives will improve earnings above and beyond the current momentum from the improving economic outlook.
“It is also hard to see any change in market dynamics, particularly after cautionary comment on the first half of this year and 2016, that will lead to a strengthening in sales of the company’s core categories while the company is being impacted by the strong take up of ‘Click and Collect’ from other competitors, such as John Lewis Partnership and M&S.
“The stock, which declined by 15% after the Q4 trading update because of company’s cautious outlook on H1/2016 sales, is rated at 13.3x F16 earnings forecasts and at 3.9x FY16 EV/EBITDA. We are retaining our HOLD recommendation and TP of 195p, assuming some upside in the stock this morning after the better than expected results.” Freddie George, Cantor Fitzgerald
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“Home Retail has ostensibly reported better than expected results. The accompanying commentary however contains in our view some cautious noises. These lead us to believe that HRG is flagging up the possibility of further sales weakness at Argos which is likely to restrain any recovery of margins.
“Within the commentary we are also taken by how much of the focus is on the Argos logistics and how little on the sales performance of the new digital store pilots. We believe that the market is more interested in the latter than the former. It assumes that management of companies of this size will be competent to deliver the proposition. What is unknown is whether the consumer will in aggregate like the new trading format/range strategy in sufficient numbers to stimulate sales growth. More importantly for the long term, will the customer mix move such that Argos becomes less dependent on low margin, very price competitive electronic categories to a meaningful extent?” Tony Shiret, BESI Research
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“FY15 prelims at the upper end of the range, with both Argos and Homebase advancing EBIT despite ongoing cost investments and store closures. Near-term focus will be on Argos, with negative trading conditions likely to persist in the first half of the year as management beds down a number of strategic initiatives and continues to refine the digital store concept. We continue to see Argos’ multi-channel credentials giving scope for long-term operational leverage, with a rebound in sales in the second half likely to act as a positive catalyst.
“Management highlighted negative like-for-likes (Q4 -5%) are likely to persist in the first half as Argos seeks to fully understand changes made, e.g. Hub & Spoke, and pricing optimisation re-launch. Transformation Plan remains “broadly on track”, a slight change in language, but market expectations have long underestimated the feasibility of Argos hitting its targets.” Alistair Davies, Investec
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“With wavering growth at Argos and continued sales and margin declines at Homebase, it seems Home Retail Group’s restructuring plans and multi-channel retail ambitions are taking longer than expected to bed in.
“Both Homebase and its largest rival B&Q have been hit hard over the past few years by the continued growth of the UK buy-to-let market, which has subdued demand for home improvement products while creating a new generation of renters who neither have the time nor the inclination for DIY.
“After announcing plans to shut 80 stores by 2018, Homebase needs to urgently prioritise the revamp of its digital proposition to boost online sales and attract a new younger customer base, replicating the success of the Argos model, while keeping a tighter control of costs by enhancing the operational efficiency of its remaining stores.” Julie Palmer, Begbies Traynor
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