Home Retail falls to record low as Argos profits tumble

A substantial number of stores may have to close as it faces the prospect of significant restructuring

Argos laid bare the depth of its troubles yesterday as profits collapsed at the catalogue specialist, wiping nearly a fifth off the market capitalisation of its parent Home Retail and leaving its shares at an all-time low.

Terry Duddy, the chief executive of Home Retail, which also owns the DIY chain Homebase, maintained the Argos “business model is not broken”, adding it was “gaining ground with our competitors”.

But a catalogue of woeful financial data from Argos gave a damning indictment of the challenges it faces at a time when rising unemployment and sky-high inflation is decimating general merchandise sales across the retail sector. City analysts largely believe the 750-store chain is being attacked from all sides by the supermarkets and Amazon, which are exacerbating the price comparison squeeze online and in stores.

Philip Dorgan, an analyst at Panmure Gordon, said: “Management has … decided that it doesn’t need to change strategy. We take a more simple view.

If it walks like a duck, quacks like a duck, then it’s a duck.”

Operating profits at Argos fell by 93.8 per cent to just £3.4m over the 26 weeks to 27 August – the lowest figure on record – on total sales down by 7.6 per cent to £1.68bn.

Richard Ashton, the finance director of Home Retail, said the fact that Argos’s operating margin had tumbled to just 0.2 per cent from 3 per cent last year was a “misnomer”, as it makes up to 80 per cent of its profits in the second half. But Mr Ashton said: “I don’t think we will ever get back to the record operating margin of 9 per cent [in 2007-08].”

But Argos said that since the halfyear end “we have not seen the improvement in sales that we had anticipated”.

Home Retail is now guiding investors towards a 7 per cent fall in full-year like for- like sales at Argos. While this is lower than its previous forecast, it would represent an improvement on the actual 9.1 per cent fall in like-for-like sales at Argos over the 26 weeks.

The group also raised for the first time the prospect of a substantial number of store closures, as it has 185 shops that either have lease renewals or break clauses over the next five years.

Richard Cathcart, an analyst at Espirito Santo, said: “Argos may have to follow other high street retailers in a significant restructuring.”

There was also mixed news on the dividend, as Home Retail held it at 4.7p but analysts, such as Mr Dorgan, expect the full-year dividend to be cut.

Following a £150.2m share buy-back last year at an average price of 233p, Mr Ashton said “with hindsight” he would rather be buying them back at £1. Shares in Home Retail closed down 20.2p, or 17 per cent, to 99.5p – an all-time low and far off a high of 498p in May 2007.

Mr Duddy said it was unlikely it would hire a new managing director for Argos, following the departure of Sara Weller, before the end of December.

With an eye to long-term succession, the group wants to recruit someone who is capable of ultimately taking over from Mr Duddy.

Home Retail’s pre-tax profits sank by 72 per cent to £29.4m, on total sales down 6 per cent to £2.57bn. Homebase’s operating profit fell by 35 per cent to £29.9m, on sales lower by 1.8 per cent to £839.6m. But Homebase fared better than Argos by posting only a 0.6 per cent fall in like-for-like sales.

In China, Argos has signed a £45m joint venture with Haier, a huge manufacturer of white goods, and will launch the website next year in the Shanghai region, including a trial store.