Home Retail warns on profits

10th Mar 2011 07:20

Argos and Homebase owner Home Retail Group has lowered full year profits guidance as trading remains tough, especially at Argos."There are clear signs of further pressures on consumer spending, with recent trading conditions, particularly at Argos, proving to be more difficult and volatile than we anticipated," said chief executive, Terry Duddy. "As a result, group benchmark profit before tax for the year just ended is now expected to be between £250m and £255m," Duddy said.Market consensus for pre-tax profit for the year to 26 February 2011 was £260.9m prior to Thursday's announcement.At Argos, like for like (LFL) sales in the eight weeks to 26 February were down 4.6% on the corresponding period of 2010. For the full-year, LFL sales were down 5.6% on fiscal 2009/10.Margins remain under pressure as the stores feel the heat of competition from supermarkets and online operators. The gross margin in the first two months of 2011 was down roughly one-and-a-half percentage points, or 150 basis points (bps), on the first two months of 2010, as the group looked to get shot of slow moving stock after Christmas.As the succession of profits warnings at entertainment media seller HMV has demonstrated, the video gaming market has been struggling while the group said the audio market has also been challenging.The group's DIY arm, Homebase, is having a better time of it with LFL sales in the 8 weeks to 26 February up 3.8% on a year earlier. The improvement was not enough to generate positive LFL growth over the full-year, however; LFL sales over the 52-week period at Homebase dipped 0.3% from a year earlier.The group closed eight Homebase stores over the year, reducing the size of the chain to 341 stores. The DIY barns saw growth in goods with big price tags, especially bathroom and bedroom items. Sales for the remaining categories were broadly flat.Gross margin at Homebase in the first two months of 2011 improved by around 300 bps, driven principally by stock management benefits and a reduced level of promotional activity, partially offset by a change in the sales mix.Argos's total sales for the year came in 3.5% lower than the year before at £4,194m, with the gross margin down by about one percentage point, while Homebase's full-year sales came in 1.4% lower at £1,551m, with gross margin more or less flat.The group expects net cash at the end of February to be around £260m, down from £414m a year earlier. "At this very early stage of the new financial year, we believe that like-for-like sales performances could be a low-to-mid single digit percentage decline at Argos and broadly flat at Homebase," the group said.Margins are expected to ease slightly at Argos and improve a tad at Homebase. Increased operating cost inflation, together with ongoing investment in long-term growth initiatives, is also likely to lead to absolute costs being moderately higher year-on-year in both businesses, the group added.