HRG under more pressure
11 March 2011 09:56
The owner of catalogue chain Argos cut profit forecasts today after admitting conditions were "more difficult and volatile" than it had expected.
Home Retail Group, which owns Homebase, is also more cautious about the year ahead and warned Argos faced another year of falling sales.
It is the latest gloomy update from the mass market retail business, which has felt the brunt of low consumer confidence and rising input costs.
Home Retail said it now expected profits for the financial year ending last month to be between £250 million and £255 million, rather than in the region of £263 million predicted two months ago. Shares slumped another 8% today.
Chief executive Terry Duddy said: "There are clear signs of further pressures on consumer spending, with recent trading conditions, particularly at Argos, proving to be more difficult and volatile than we anticipated."
Argos saw like-for-like sales drop 5.6% in the financial year and Home Retail warned it expected a similar decline in the current year.
The final quarter of the year saw a 4.6% drop in sales, but this compared with a weak period a year earlier when snow caused a decline of 9.4%.
Home Retail said the video gaming market continued to be weak, offsetting strong performances for laptops and tablet computers and further growth in the white goods and toy categories.
Margins came under pressure as Argos was forced into an increased level of clearance activity.
The group added that Homebase like-for-like sales were down 0.3% over the year and looked set to be broadly flat in the current financial year.
Homebase saw like-for-like sales increase 3.8% in the eight weeks to February 26th, helped by sales of big-ticket items such as bathroom and bedroom furniture. Reduced levels of promotional activity benefited margins.
The DIY business now operates from 341 stores after eight closures in the financial year. The portfolio of Argos outlets increased to 751, while internet business now accounts for 36% of Argos sales due to the continued popularity of online reservations for store collection.
Home Retail warned that cost inflation and investment in long-term initiatives meant overheads were likely to be moderately higher this year.
Keith Bowman, an equity analyst at Hargreaves Lansdown stockbrokers, said sales promotions were eating into profit margins at Argos, whilst changes in the former growth area of gaming as more customers choose to download video games was taking its toll.
He added: "Whilst the business model at Argos continues to lend itself to the lower cost internet sales channel and Homebase benefits from homeowners' reluctance to move - preferring to renovate - management, for now, appears devoid of turnaround initiatives.
"Cash is leaking, with the danger now being that investors will soon begin to fret over potential cuts to the dividend payment."
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