Broker snap: Home Retail needs to revitalise Argos

14th Sep 2010 12:46

If you have shares in Home Retail Group, take advantage of any share price strength to reduce your holding, is the advice from Nomura Securities, which sees an uncertain earnings outlook for the retailer.The retailer's Argos brand is suffering from "falling margins, low growth and a lack of product emphasis" in the view of Nomura analyst Christopher Walker. "The Argos business model is not broken," Walker asserts, but the positioning of the catalogue retailer has "emphasised its cyclicality.""Our analysis shows that the low-demographic Argos customer will remain under pressure into 2011. However, Argos's focus on WOW products and 'value' lines has facilitated further trading down and lower cash margins, in our view. Although supporting its lower demographic consumer base, if this trend continues, the brand will remain highly cyclical in nature," Walker believes.It's not all bad news, however. "Stores are still consistently utilised in 88% of transactions. Consumers like the convenience versus delivery, giving Argos a strong advantage, even against internet peers," Walker claims."A solution of rebranding and store refits will help to deliver a more aspirational brand, but further product focus is needed, in our view. 'Must have' items at the best price and aspirational ranges may widen the appeal of the brand, helping to expand cash margins, while not isolating the core customer base," the broker maintains.The share price is trading a little above Nomura's price target of 200p. The broker has a "reduce" recommendation for the stock.