9th Jun 2016 11:40
LONDON (Alliance News) - Home Retail Group PLC on Thursday reported its best sales performance in two years at its Argos stores, in the first quarter of its financial year and ahead of its takeover by grocer J Sainsbury PLC.
Home Retail said total sales at digital retail chain Argos grew by 2.6% year-on-year in the 13 weeks ended May 28 to GBP868 million, with like-for-like sales up by 0.1%. Net new space contributed 2.5% to total sales growth, as a result of store openings in the previous financial year.
This came after like-for-like sales at the struggling retailer had fallen by 2.6% in its last financial year, which ended February 27. At that time, Home Retail had said that sales were hit by a decline in electrical products including TVs, tablets and white goods.
However, on Thursday, Home Retail said this trend had partly reversed, with sales growth in the first quarter boosted by both electrical and non-electrical categories. Growth in electrical products was principally attributable to sales of the previously declining TV and tablet categories, as well as mobile phones and computers, although white goods continued to decline.
The improved performance of "margin-dilutive" electrical products, however, resulted in a negative sales mix impact, which contributed to a 100 basis points decline in gross margin, Home Retail said. Margin also was hurt by adverse movements in foreign exchange rates and shipping costs.
Non-electrical product sales were driven by furniture and sports products, partially offset by weaker sales of seasonal goods, Home Retail said.
Internet sales grew by 16% in the quarter, which was Home Retail's strongest quarterly digital sales growth for over three years. Digital sales accounted for almost 50% of total Argos sales, including mobile commerce which now represents almost 30% of sales.
Home Retail has been working to reinvent Argos from a catalogue retailer to a digital retailer with a heavier online focus offering the benefit of 'click and collect' from Argos high street stores.
Under Argos's five-year 'transformation plan', which began in October 2012, Home Retail has launched a fast-track delivery service providing both same-day home delivery and store collection, and opened 177 digital stores, representing 21% of the total store estate.
The smaller, new-format digital stores offer the most popular products for immediate pick-up, with 20,000 products available for pick-up within a few hours of placing an order online under a 'order by 1pm for same day collection' guarantee.
Home Retail has also been opening digital Argos concessions in other stores, including within DIY retailer Homebase, which Home Retail recently sold off, and in the food stores of Sainsbury's, which is in the process of buying Argos.
A total of 114 Argos concessions have been opened to date, but the 101 concessions which are in Homebase will be removed within the 18 months following the sale. Home Retail warned in April that, in the absence of alternative locations, this would result in a GBP10 million reduction in Argos' benchmark operating profit.
On Thursday, Home Retail announced that two digital Argos concessions within Homebase stores were closed in its first financial quarter, reducing the total Argos store estate to 843.
Home Retail also said it will increase by GBP30 million its provision for customer redress, after the group's financial services division "erroneously collected excess fees" in relation to the late payment of amounts due from certain store card customers.
Home Retail already booked a GBP17 million charge in its financial 2016 accounts for this, but has since "been advised that a more extensive customer redress programme will now be required" and so will increase the provision, which stood at GBP62.9 million in financial 2016.
"I am pleased with our performance in the first quarter. Argos delivered good total sales growth together with positive like-for-like growth, representing its strongest sales growth performance in eight quarters. This was achieved against the challenging backdrop of constrained seasonal product sales due to poor weather, on top of a deflationary pricing environment," Home Retail Chief Executive John Walden said in a statement.
"Finally, we remain on track to complete the proposed transaction with Sainsbury's in the third quarter of this calendar year. Given the natural distraction that a transaction such as this can be for our colleagues, on top of the recent sale of Homebase, I am particularly pleased with our performance in the quarter," Walden added.
Home Retail sold DIY chain Homebase to Australian conglomerate Wesfarmers Ltd in February for GBP340 million, with the rest of the business, comprising Argos, in the process of being bought by big-four supermarket chain Sainsbury's for GBP1.2 billion.
In its own trading update on Wednesday, Sainsbury's said it expects the takeover to complete in the third quarter of 2016, which Home Retail reiterated on Thursday. The deal is currently in the hands of the UK Competition & Markets Authority which is considering any potential competition concerns.
Also in Sainsbury's update on Wednesday, the grocer reported a fall in like-for-like sales in the first quarter of its financial year, reversing the improving trends it had been seeing in the preceding few quarters. In the 12 weeks ended June 4, like-for-likes fell by 0.8% excluding fuel and by 1.0% including fuel. Total retail sales were up 0.3% excluding fuel and down 0.1% including fuel.
Shares in Home Retail were trading up 0.1% at 161.20 pence on Thursday afternoon, while Sainsbury's shares were trading down 0.1% at 250.30p.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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