View from City Road: Argos thins its catalogue of woes

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INVESTORS' love affair with Argos, the catalogue showroom retailer, lasted just one year after its spin-off from BAT Industries and flotation in March 1990.

During that halcyon time it enjoyed a healthy premium, in terms of its price-earnings ratio, in relation to the stores sector and stock market. But Argos's share rating has since plunged to a historical discount.

Hopes that Argos would prove to be more recession-resistant than most retailers were undermined in 1991 when profits fell amid aggressive price discounting towards the end of the year. Like-for-like sales fell by 2.6 per cent in cash terms and twice as much by volume.

Meanwhile, the likes of Marks & Spencer and the big three food retailers, displaying genuine trading resilience, have outperformed strongly.

Yesterday Argos shares jumped in relief by 15p to 219p as the group indicated that the decline in like-for-like sales had slowed to 0.9 per cent in the first half and that sales had in fact turned mildly positive in July and August.

This is significant because these two months were star performers, relatively, in 1991. There is a temptation to regard it as a turning point in Argos's stock market fortunes.

Certainly underlying half-year pre-tax profits were ahead by over 7 per cent excluding pounds 2m start-up costs at Chesterman Home Furnishers. A 50 per cent rise in average cash balances boosted interest income from pounds 3.5m to pounds 4.3m. Argos has also managed to increase its gross margin by 0.5 percentage points but this was largely due to the loss of low-margin DIY sales.

But net margins are sagging, despite cuts in head office and distribution costs, under the weight of tighter pricing, wage increases of 5 per cent and double-figure rent rises.

The poor timing of Chesterman's launch means it will lose another pounds 2m in the second half and overall Argos's pre-tax profits may show little advance at pounds 63m.

A prospective p/e of 16, after yesterday's price jump, looks a little demanding. The worst, however, is probably over.

(Photograph and graph omitted)