Argos and Hombase have both enjoyed superb starts to the year. But John Walden, the new chief executive of parent company Home Retail Group (HOME), warned that comparatives will become tougher in the next few months. Homebase in particular will be running against the wind, given last year's second quarter like-for-like sales growth of 11 per cent.
"Unless we repeat last year’s record-breaking summer or England makes it to the World Cup final, it’s fairly unlikely Homebase will report positive like-for-likes in the second quarter," he said. Given last weekend's match against Italy and England’s maritime climate, neither prospect seems likely.
Still, management is retaining its pre-tax profit guidance for the full year of £122-135m. At Argos, like-for-like sales grew 5 per cent to £868m in the first quarter, the eighth consecutive period of underlying growth, driven by televisions and video gaming, garden furniture and outdoor toys. This more than offset declines in homeware, jewellery and tablets. Mr Walden said he was happy with Argos's new-style digital stores, but that it was too early to judge performance. At Homebase, like-for-like sales rose 8 per cent to £445m, as seasonal products - barbecues, power tools, outdoor plants - flew off the shelves, accounting for 40 per cent of total sales in the quarter.
Espirito Santo says...
Neutral. The investment case for Home Retail Group is based on the combination of a UK consumer recovery and the digital re-invention of Argos paying off. Argos is still in the early stages of its modernisation programme and management's demanding four-year targets may well be achievable, but so far we haven't seen much to indicate that the long-term strategy is being delivered. We remain agnostic until a more meaningful update is provided. It's also important to recognise that departing chief executives often present near-term earnings vulnerability, while the sector as whole is in an end-of-IPO derating phase as the prospect of rate increases draws nearer.
Nomura says...
Buy. Home Retail Group is investing in growth, and a big part of that is the hub and spoke distribution model that will be rolled out to all stores over the course of the year. This will increase the range of products available for delivery and service the smaller Argos concept stores. Management will also turn its focus to own-branded products. As a result, we believe Argos's strategy to achieve £4.5bn of annual sales and mid- to single-digit operating margins by 2018 is a credible one that will be helped by the easing UK economy. The current share price, meanwhile, factors in slimmer margins and lower sales. Expect pre-tax profit of £133m this financial year, with EPS of 12p.
