Argos And Homebase Owner Warns On Profits

Shares (Berlin: DI6.BE - news) in the company behind Argos and Homebase fell 14% at the start of Wednesday trading after it warned on annual profits - with "challenging" Argos sales partly to blame.

In its first-half results covering the six months to 30 August, Home Retail Group said that while its Homebase DIY and homewares chain grew sales, profits and sales at Argos were hit by declines in electrical and seasonal product categories.

The strategies for both chains could not be more different.

While unprofitable Homebase stores are being closed - 25 of them in the first half - and infrastructure costs reduced, Home Retail (Other OTC: HMRLF - news) has been investing heavily in a digital transformation of Argos.

It (Other OTC: ITGL - news) recently launched a same-day delivery service to challenge the might of Amazon and is rolling out a network of digital concession stores.

It opened 86 over the six months - taking the total to 148 - with digital sales now accounting for 45% of the total.

John Walden, the Home Retail chief executive, said: "We look forward to an improved sales performance for both Argos and the Group in the second half.

"However, as I have previously stated, trading at Argos during this year’s important Christmas season seems less predictable than usual, as both retailers and customers determine whether to repeat last year’s unusual Black Friday patterns.

"The combination of this trading uncertainty, an increased level of investment in the launch of Fast Track and the underlying profit reduction from Argos’ challenging first half, mean that at this stage of the financial year we expect the group’s full-year benchmark profit before tax to be slightly below the bottom end of the current range of market expectations of £115m to £140m."

Home Retail's market value was down 28% in the year-to-date ahead of today's trading.

Shares were down more than 17% in early afternoon deals.

Keith Bowman, equity analyst at Hargreaves Lansdown (LSE: HL.L - news) , commented: "Despite a significant push for Argos towards the digital era, its reliance on electrical sales continues to drag.

Store readjustments for both Argos and Homebase are being made, whilst the highly competitive environment, particularly for Argos, continues to underwrite the need for profit margin lowering promotional sales.

"In all, group recovery hopes look to have been dashed again, with current analyst opinion for a strong hold likely to come under clear downward pressure."