The Investment column: Argos prospers without the glitz

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Argos is a group which appears to defy normal retailing logic. Eschewing the prime locations and glitzy presentation which others regard as essential to success on the high street, the catalogue showroom operation has prospered in the austerity of the 1990s.

Argos would claim that its recent success has less to do with the current retail environment and more with its own efforts. Yesterday's 45 per cent rise in interim profits to pounds 31.8m was fuelled by like-for-like growth through the stores of 11 per cent. That is only just over half the growth rate typically returned by the group in the heady days of the 1980s and Mike Smith, chief executive, would say only around 2 percentage points of the latest figure relates to revived consumer confidence.

Whatever the truth of the matter, the group's deceptively simple plan to set the pricing agenda on the high street, while expanding its range, has struck a chord with consumers. The group has held or cut the price of around 70 per cent of its lines and yet still managed a modest 0.4 per cent gross margin gain in the first half. Argos freely admits that much of this is down to one-off factors such as abnormally low stock levels last winter and exchange benefits. In a more normal year, it would expect to see margin erosion of nearer 0.1 per cent, but through mix gains and direct buying from overseas, hopes it should be no worse than that on average.

But management of austerity extends beyond gross margins at Argos. High operational gearing and iron control of costs helped translate the 18 per cent rise in first-half sales into a 64 per cent rise in operating profits, which came in at pounds 25.5m.

With typical caution, the group yesterday offered a series of reasons why the all-important second half might be tricky, including bearing an extra pounds 6m for catalogue costs due to higher paper prices and increased competition from rivals. Even so, analysts were busy upping forecasts yesterday on the promising sales figures, with Barclays de Zoete Wedd now looking for pounds 150m.

With scope to raise the number of domestic stores by up to 50 per cent from the 404 expected to be in place by the year end, there is still plenty to go for in the core business. The only worry is what happens with diversifications. It is early days, but this year's first move overseas, to Ireland, seems to have gone well. The move to the Netherlands, where Argos sees the potential for 70 stores, will involve more risk.

A departure into mainstream retailing would be more serious. The acquisition of Signet, the jewellery chain, seems to be off the agenda, but with firepower of up to pounds 500m, Argos has the scope for a large mistake.

With that in mind, the shares, up 14p at 757p, look high enough on a forward p/e of 22.