Home Retail drops on Deutsche Bank downgrade

3rd Aug 2015 12:05

(ShareCast News) - Home Retail Group was under pressure after Deutsche Bank downgraded the stock to 'hold' from 'buy' and cut its price target to 160p from 220p.The bank pointed out that it's been a particularly challenging 2015 for Home shares, which have underperformed the sector.There are three reasons for the downgrade.The first is an even more competitive UK electricals sector than the bank had expected. Electricals represent around 50% of Argos' sales.The second reason is margin pressures, said Deutsche, adding that dollar pressures on Argos' sourcing costs are likely to peak in the second half of 2015 and first half of 2016. In addition, the new national living wage legislation is likely to pose low-margin retailers like Argos the most challenge, it said.It said that while management has an excellent reputation for cost efficiency, these pressures may offset any positive operational leverage.Finally, the bank said there is no support from free cash flow dynamics. "We estimate that Home's balance sheet cash represents around 50p per share, but the Argos transformation plan is absorbing cash and we expect outflows for the next two years."At 11:11, Home Retail shares were down 3% at 158.40p.