Broker snap: Home Retail's turnaround at Argos will fail, says Panmure Gordon

14th Mar 2013 09:22

Argos and Homebase owner Home Retail impressed the market on Thursday after raising its profit guidance for the second time this year, but Panmure Gordon chose to reiterate its 'sell' rating for the stock, telling investors not to get carried away.Shares were up 12.16% at 149.06p in mid-morning trade after the company reported like-for-like (LFL) sales growth of 5.2% at Argos in the last eight weeks of the year, well ahead of the 2.1% consensus forecast. Homebase LFL sales were down 1.5% but still better than the -2.8% estimate.The firm now expects pre-tax profit for the year to March 2nd to total £90m, ahead of earlier (already upwardly-revised) guidance and the £84m current consensus figure."These numbers show the third consecutive quarter of LFL sales growth for Argos and industry outperformance for Homebase. However, let us not get too carried away," Panmure said."Argos's profits have fallen from £376m to less than £100m since FY2008, driven by a LFL sales decline of nearly 20%. In FY2013, LFL sales at Argos are ahead by 2.1% against a period LFL sales fell by 8.9% and after a major competitor in one of its biggest categories went out of business. Homebase's profits are one third of that achieved in FY2008, but its two year LFL sales have fallen by nearly 10%."The broker said that the turnaround at Argos will "take too long" and it will never be the 'digital leader' that it hopes to be. "We think that there is too much to do, digital disruption will change too much in the next five years and the competition is too fierce and nimble."Panmure has left its target price at just 80p."We also believe that many traditional retailers are making a virtue out of a necessity in that they have a lot of stores and so they are building bricks and mortar into an online model. Long term, we think that this will fail."BC