Electrical sales spark Home Retail profits boost, new CEO chosen - UPDATE

16th Jan 2014 08:25

- Total Q3 sales up 3.6 per cent- Argos sales improve with margins unmoved- Homebase beats LFL expectation but margins worsen- FY profits guided to top end of range- Argos MD John Walden chosen as new group CEOAfter a happy Christmas of strong tablet computer and white goods sales, Home Retail Group said that full year profits were likely to be at the top end of expectations. Total like-for-like sales at Argos grew 3.6% to £1.8bn, with Homebase like-for-likes up 4.7% to £464m.Gross margins were down 50 basis points (bps) at Argos, in line with the rest of the year as electrical products dominated, while Homebase margins were expected to be flat during the period but slipped 75bps due to higher big ticket sales. With Chief Executive Terry Duddy due to step down in July, current Argos Managing Director John Walden has been selected to step up to the top role after reinvigorating the catalogue retail chain. was well pleased with the performance in the face of challenging consumer headwinds, with internet sales up from 42% to 46% of the group top line. "In its peak trading period Argos has continued to grow internet sales, which now represent nearly half of total Argos sales. This growth was supported by a strong performance in mobile commerce sales which represented 20% of total Argos sales in the period."Mobile commerce sales grew by 75% against the same period last year to represent 20% of total Argos sales in the period, up from 12% in the prior year. Argos's electrical products trading benefited from growth in video gaming, tablets, televisions and white goods, partially offset by the continued declines in audio and photographic sales and partially offset by declines in the homewares and jewellery categories. He said these trends gave further reinforcement to management's plan for Argos to become a "digital retail leader", with six new-look trial stores using voice-activated computer systems, iPads, free Wi-Fi and digital signage to drag the brand appearance into the new digital age. Principally on the back of Argos's buoyancy, Duddy said he expected the group would achieve full year profits "towards the top end of the current range of market expectations of £90m to £109m" and remained on track to deliver all its investment plans.Analysts Mark Photiades and Matthew McEachran at broker N+1 Singer said this would represent a circa 20% year-on-year uplift in profitability."There can be no doubt the new MD at Argos is parly responsible for the turnaround and his appointment as group CEO this morning to replace Duddy should be well received," they wrote.The investment case presents an interesting conundrum, they added, with Argos's significant operational gearing likely to continue to benefit in the short term from self-help, PPI payouts, the demise of competitors and strength of underlying product markets, with new trial stores and the trial with eBay also presenting an opportunity. "However, we remain cautious on the longer term outlook for the business believing that management's targets still feel a little too optimistic, already require circa £800m capex over five years including cash hungry refits at Homebase, and may yet need more radical surgery around the store portfolio," the analysts said, retaining their 'hold'. "In the short term, though, the shares should respond well to further upgrades and the management change and should move through our target price."Shares in Home Retail were up 3.1% to 207.25p at 08:30 on Thursday.OH