What's new:
■ Profit forecasts upgraded
■ Four quarters of consecutive sales growth
■ Better cash flow than expected
Terry Duddy's final trading update as chief executive of Home Retail Group (HOME) was a strong one - so much so that management upgraded its earnings guidance. After bumper trading at both Argos and Homebase in the final eight weeks, pre-tax profit for the financial year ended 1 March will be ahead of the top end of consensus forecasts of £107m to £111m.
Argos achieved like-for-like sales growth of 5 per cent in those eight weeks, bringing full-year growth to 3 per cent. Meanwhile, Homebase expanded underlying sales by 9 per cent to deliver full-year growth of 6 per cent. This is the first time since 2006 that both businesses have delivered like-for-like sales growth in all four reporting periods.
Homebase enjoyed strong sales of 'big ticket' items, while garden plants and power tools flew off the shelves thanks to a much warmer start to the year. At Argos, electricals drove the performance, with TVs, small domestic appliances (particularly irons and microwaves), video gaming kit and white goods responsible for the stellar sales growth. Revenue was flat across the remaining product categories, and jewellery sales dipped slightly compared with the prior year. "It has been terrifically exciting and I'm sorry to be leaving," says Mr Duddy, who has been at the helm for 15 years.
Bank of America Merrill Lynch says...
Buy. Home Retail has issued a better than expected update for the fourth quarter, with both sales and gross margins stronger than we had expected, particularly at Argos. The group also believes its year-end cash position to be £330m - ahead of our £300m estimate. We have raised our pre-tax profit forecasts by 5 to 6 per cent and now expect adjusted EPS of 10.3p for the year ended 1 March 2014, rising to 12.2p for the current financial year. Given the momentum and recovery potential, the valuation is attractive. Home Retail's enterprise value is now seven times calendar year 2014 cash profits (adjusting for leases) - compared with an average ratio of more than nine times for the sector.
UBS says...
Buy. This was another good performance. Homebase sales were up in all categories for the first time in many years, suggesting that rising numbers of housing transactions are flowing through to sales. Consensus profit forecasts for fiscal 2013-14 are likely to move up 2 to 3 per cent in line with the new guidance. For the current year, the stronger exit rate for sales is good news, and a stronger sterling may help second-half gross margins. But the cost base is now starting to inflate, reflecting Argos's modernisation plans as well as volume growth. Homebase also faces a tough set of comparative numbers in the first half after last year's bounce.
