Home Retail returns to growth and eyes 'leadership position'

30th Apr 2014 08:09

- Sales up three per cent- Like-for-likes positive in both businesses- Underlying PBT up 27 per cent- Dividend up 10 per cent to 3.3pAnnual sales and profits returned to growth at Home Retail as Chief Executive Terry Duddy stepped down, with results reaching the top end of expectations thanks to like-for-like improvements at both Argos and Homebase.Incoming Chief Executive John Walden, who has been running Argos for the previous two years, said management were committed to using the group's strong financial position to invest in improving the business to "innovate and lead in this changing market", which some analysts viewed with caution as a potential drag on future earnings.Sales rose 3% to £5.66bn for the year to the end of February and the company's 'benchmark' profits before tax and exceptional items rose 27% to £115.4m, ahead of consensus. Including exceptional items, statutory pre-tax profits fell 41.1% mainly due to restructuring charges at Argos and a payment protection insurance provision. Walden said the group had delivered a good performance in what remained a challenging market, with both businesses recording positive like-for-like sales for all four reporting periods. He added that management made good progress with their strategic plans in both businesses, "which will become increasingly important in a competitive retail environment where shopping behaviours are changing rapidly".Between the divisions, Argos's operating profits increased by 12% to £112.3m, while Homebase's profits rose by over 70% to £18.9m. Boosted by strong online and mobile performance, Argos, which has begun to roll out a modern new store format, enjoyed particularly strong sales in number of product categories, most notably electrical products including tablets, televisions, white goods and video game systems.A focus on big ticket items helped Homebase, as did good weather in the second quarter.Walden said the group's strong financial position - it had net cash of £331m at the period end - enabled good progress from investment in the strategic growth plans in both businesses. The group increased capital expenditure to £173.1m from £78.7m. He said traditional retailing was fundamentally changing and Home Retail was adjusting to take a leadership position. "Customers continue to shift their shopping habits, and most of them interact with digital devices at some point in their shopping journey. They have come to expect multiple shopping channels, large product choice, low prices, and flexible options for obtaining their products, including collection in a local store and home delivery. "Home Retail Group believes that it can innovate and lead in this changing market, and thereby secure for itself long-term business growth."He stressed that the strategic plans were multi-year and remain early in their development, implying reasonable levels of capex in coming years."Many of the important systems capabilities, new customer propositions and increased financial expectations lie ahead, and the group cannot count on external factors to drive the business forward. The group has a strong financial position, which will enable it to invest in the Argos Transformation plan to reinvent it as a digital retail leader, and in the Homebase Renewal plan."Cantor Fitzgerald was "impressed with the early, initial results of the new Argos format which is currently being rolled out", but retained a 'hold' recommendation and target price of 215p. The broker said: "We believe the Argos initiative is factored into the valuation, private equity is now less likely to take an interest attracted by the strong balance sheet and AO World, a recently listed competitor, will start to make inroads into the Argos electrical categories."Analysts at Hargreaves Lansdown said new CEO Walden provided "a mix of cautious optimism" and kept his 'hold' stance in light of the strong share price performance in the last year.On the upside is a favourable model at Argos, strong group distribution and logistics capabilities and a flexible store base."More cautiously," he said, "management outlook comments continue to assume a subdued consumer environment, while required group investment going forward increases costs and therefore acts as a drag on earnings."Shares in the group were down 0.8% to 204.2% at 09:05 on Wednesday.OH