Broker snap: Rising costs a concern at Home Retail, says Nomura

20th Oct 2011 12:30

Nomura has kept its reduce rating and cut its target price for Argos and Homebase owner Home Retail, saying that rising costs and the outlook are an ongoing concern."1H results surprised to the downside, with Homebase reporting a weaker-than-expected outturn driven by higher costs, while Argos barely broke even," the broker said.Nomura now expects full-year costs to be around £20m higher than last year due to underlying cost inflation as well as initiatives at Argos, "thus limiting the group's ability to offset macro-related trading weakness, which appears to have continued into Q3."These costs, along with gross margin pressure and a subdued start to the second half, have prompted the broker to cut its full-year pre-tax profit estimate by 18%. As such, the target price comes down from 130p to 110p.Fellow broker UBS also cut its target price from 130p to 110p for Home Retail, saying that "current trading is below expectations and remains volatile". A neutral rating was kept.Nevertheless, shares were trading 5.33% higher at 104.8p by 12:29, recovering from this week's earlier sell-off, as retail sales volumes for the month of September came in ahead of expectations.BC