Slump sees Argos out of Footsie: The Investment Column

It has not been a good couple of months for Argos. The highly regarded catalogue retailer came back to earth with a bump in January when it issued a profits warning caused by a slowdown in pre-Christmas sales. Later this month it will be relegated from the Footsie as a result of the share slump.

Investors were looking to yesterday's results for re-assurance that the Argos bubble has not burst. The reassurance duly arrived, though it was couched in cautious terms by the resolutely downbeat chief executive, Mike Smith.

His view is that retailers face a tough future with intense competition and value-conscious shoppers. The good news for Argos investors is that the company has built its reputation on value and is well placed to take advantage.

With profits 14 per cent higher at pounds 141m Argos shaved its prices by 1 per cent in 1996 but still managed to increase margins by 0.4 percentage points thanks to better sales of higher-margin ranges.

Costs also rose, due largely to higher paper prices and longer print runs of catalogues. Though first-half profits are unlikely to exceed last year's record half, it is the second half that matters.

Argos hopes to avoid market saturation by adding smaller Call & Collect stores where customers order their goods for later collection.

The move into Holland looks interesting though it will cost pounds 5m this year. Argos still has pounds 114m cash and though a pounds 1bn buy is possible, the company says, the money may be returned to shareholders if a suitable target is not found.

Like-for-like sales growth of 7 per cent in current trading conceals double-digit growth in toys, electrical and jewellery, the three sectors which contributed to the sales slowdown pre-Christmas.

With analysts expecting profits of pounds 160m the shares - up 9.5p to 648.5p yesterday - trade on a forward rating of 17. Still worth holding.