Home Retail delivers poor LFL sales but Canaccord impressed by margins

15th Jan 2015 09:15

Home Retail, the owner of the Argos and Homebase, sacrificed like-for-like (LFL) sales in the third quarter to protect profitability, according to Canaccord Genuity.LFL sales at Argos rose by just 0.1% in the 18 weeks to 3 January, well below Canaccord's +2.2% forecast, while LFL sales at the smaller Homebase chain increased by 0.4%, compared with the +3.3% prediction.However, worse-than-expected LFL sales were offset by a better-than-forecast gross margin performances and a tight control of costs, the broker said.At Argos, margins unexpectedly improved by 25 basis points (bp), compared with analysts' forecasts for no change, "on the back of reduced promotional activity, favourable FX and freight cost movements partially offset by adverse mix movements due to strength of lower margin electrical products", Cancacord said.Meanwhile at Homebase, margins fell by 100bp (forecast: -125bp).Given the improved outlook for margins and despite the poor LFL performance, Canaccord said it would not be changing its profit before tax forecast of £129m for the year ending February 2015.The broker maintained its 'hold' recommendation and 188p target price for the stock, which it said is trading at 15.8 times earnings for this financial year."After five years of significant declines in profitability, earnings growth returned last year and Home Retail, under the leadership of CEO John Walden, is attempting to rebuild itself," it said."Argos is now fully embracing the digital age with a new modern store fit better suited to the needs of today's consumer. A reconfigured supply chain is also helping to bring efficiencies. With a newly devised strategy Homebase looks set to remain with the group, albeit with a much smaller yet hopefully more profitable store estate."