11th Sep 2014 08:18
LONDON (Alliance News) - DIY and general merchandise retailer Home Retail Group PLC Thursday reported a ninth consecutive quarter of like-for-like sales growth for Argos, this time supported by margin growth, but tepid growth at its Homebase DIY unit as sales of seasonal goods fell short of last year.
Home Retail said it expects to report a benchmark profit in line with market expectations for the full year, in the range of GBP122 million and GBP135 million, although, as always, this will depend on how Argos performs over the key Christmas trading period.
"To meet that target, we need Argos to continue its current run rate, with like-for-like sales broadly around 3% and margins close to flat," Chief Executive John Walden told journalists Thursday.
The group also remained cautious about its trading environment, saying that while it was cautiously optimistic about the economic outlook, it wasn't yet confident that a broad-based and sustainable consumer recovery was in place, with the recovery patchy amid categories and "inconsistent" in geographies.
"The recovery started in the South East and that is where we really saw the early strength. We are also seeing different indicators of wage growth in London, the South East and other areas of the country. From our view its not clear that there is a clear pattern of recovery, and there is inconsistencies," said Walden.
"We remain cautiously optimistic about the broader economic environment," the company said.
This was more cautious than fashion and home goods retailer Next PLC, which said Thursday that it had been given a boost by the improving economy, low interest rates, increasing availability of credit, less general discounting on the high street, and an improved housing market.
In its trading update, Home Retail said like-for-like sales at Argos were up 1.2% in the 13 weeks to August 30, its fiscal second quarter, driven by increased sales of electrical products like TV's, game consoles like Xbox and PS4 and white goods, which offset continuing falling sales of tablets, furniture, homewares and jewellery.
Argos total sales were up 1.4% at GBP901 million in the quarter, with new space contributing 0.2% as it added 13 stores.
The like-for-like sales growth at Argos was a slowdown from the 4.9% growth it had reported in the first quarter, and meant growth for the whole first-half was 2.9%. Total sales in the first half were GBP1.77 billion.
"The first quarter was significantly ahead of the city, due to seasonal products, and we expected a lower rate in the second quarter, which is exactly what happened," Walden told journalists.
Gross margin in the business rose about 25 basis points in the second quarter, thanks to a lower level of promotions which offset a hit from higher sales of low-margin electrical products.
Home Retail has been trying to boost Argos' online presence, but said Thursday that sales via the internet grew in line with total sales in the quarter and represented 44% of total Argos sales. Within this, mobile commerce grew by 36% and represented 22% of total Argos sales, it added.
Meanwhile, like-for-like sales at Homebase rose just 0.1% on the year in the second quarter. It said it had seen good demand for big-ticket items such as kitchens, bedrooms and bathrooms, but this was offset by a decline in sales of seasonal products after a very strong performance last year.
Total sales at the DIY retailer were down 2.8% at GBP390 million in the quarter, mainly because it closed six stores in the quarter. The unit's gross margin also fell by about 75 basis points, which it blamed on stock clearance promotions in the stores it was closing, as well as the higher sales of lower-margin big ticket items.
Homebase's like-for-like sales growth in the second quarter was also a big slowdown from the 7.9% growth it has posted in the first quarter. That meant growth for the whole of the first half was 4.1%.
However, Home Retail said it was pleased with the second quarter performance at Homebase, particularly as it was up against tough comparatives.
"Homebase performed well over its peak trading period, following up its good performance in the first quarter with broadly flat like-for-like sales in the second quarter. This is especially pleasing given that we achieved this against a strong 11% like-for-like in the same period last year," it said in its statement.
Home Retail faced media speculation late July that it was planning to spin-off its Homebase business in order to focus on its plans to turn Argos into a digital retailer, which the group said is on track and on budget. The group is in the midst of taking its existing Argos stores and updating them to its new digital model, and is also putting some of those stores into its Homebase stores.
"We will have a total of 50 digital stores in the market by peak trading. Some of those will be new stores, some conversions. At this point, customers love the new model," said Walden.
Walden said Thursday that while the group continues to look at the structure and strategy of the company, divesting Homebase is not currently in its plans.
"Homebase is a good business, and has good growth prospects. There is no decision to divest Homebase from Home Retail and there is no sale process going on. At this stage it's just pure speculation," said Walden.
Home Retail shares were down 5.0% at 178.00 pence Thursday morning, the second-biggest decline on the FTSE 250.
By Steve McGrath; [email protected]; @stevemcgrath1. Additional reporting by Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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