Argos dips after warning: Worries about sales tailing off overshadow 38% rise in profits

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ARGOS, the catalogue retailer, increased first-half pre-tax profits by 38 per cent to pounds 13.2m, helped by the closure of its loss-making furniture chain and a merger of its three catalogues. But the City worried about its warning that the increase in sales would tail off in the second half and marked its shares down 10p to 328p.

The pounds 13.2m pre-tax profit for the 24 weeks to 19 June was struck on sales up 10.3 per cent at pounds 366m. But the pounds 9.5m earned in the previous period was depressed by a pounds 2.2m loss from Chesterman, its home furnishings operation, which was closed at the start of the year. Excluding that, profits were up 11.9 per cent, while like-for-like sales in its stores grew 5.9 per cent.

Mike Smith, chief executive, said the improvement was partly due to the group's decision to offer one catalogue at all of its outlets.

Merging the catalogues has added pounds 700,000 to costs, but it also accounted for more than 4 per cent of the sales growth. The merger process started in the second half of last year and Mr Smith warned that they 'are not expected to produce any significant additional benefits in the second half of the year.' The increases were achieved in spite of a 1 per cent fall in prices.

The price pressure is continuing; in the current catalogue, 75 per cent of the items that were featured last year are at or below the previous price. Despite that, the value of sales so far in the second half is up by more than 2 per cent.

'We are seeing recovery and the underlying growth is getting stronger,' Mr Smith said. 'But it is patchy and fragile.' And he warned that tax changes in the November Budget could affect the Christmas period, which accounts for a quarter of the group's sales.

Lower interest rates meant interest income fell from pounds 4.2m to pounds 3.4m, despite a rise in average cash balances from pounds 88m to pounds 112m. Seven stores were opened in the first half, and a further 18 are planned for the second, which will bring the total to 322.

Mr Smith said the group was looking at a 'number of options' for expanding beyond catalogue shopping following the closure of Chesterman, its first attempt at diversification. It will consider buying a business, rather than creating one itself. A rights issue to finance such a deal is possible, he said.

Earnings per share were 2.93p, up from 2.08p, and the interim dividend is increased by 6.8 per cent to 2.35p.