Bloomberg News

Home Retail Shares Plunge After Company Cuts Argos Forecast

June 09, 2011

(Updates with CEO’s comment on full-year profit estimates in 10th paragraph, Argos margins in 11th.)

June 9 (Bloomberg) -- Home Retail Group Plc fell the most ever in London trading after a slump in first-quarter sales of televisions and video games led the company to cut the annual revenue forecast for its U.K. Argos chain.

The shares declined as much as 15 percent to 172.7 pence, the lowest intraday price since Nov. 24, 2008.

Same-store sales at the 750-store Argos chain will show a “mid-single digit” drop for the year, Chief Financial Officer Richard Ashton said on a conference call today, down from a previous indication of a “low- to mid- single-digit” decline.

Revenue at Argos stores open at least a year fell 9.6 percent in the 13 weeks ended May 28 as consumers reined in spending amid higher fuel prices and government cutbacks, the Milton Keynes, England-based retailer said. Shore Capital analyst Ramona Tipnis had estimated a 4 percent drop.

“Argos remains under pressure from a weak consumer environment while the food retailers continue to grab share in its core markets,” Freddie George, an analyst at Seymour Pierce in London, wrote in a note to clients. Grocers are increasingly selling non-food items such as TVs. He has a “hold” rating on the shares, which traded at 179.1 pence as of 10:14 a.m.

Televisions

“Consumers are continuing to tighten their belts for big- ticket purchases,” Chief Executive Officer Terry Duddy said on the call. Duddy is refurbishing 200 Argos outlets in an effort to stem two years of declining profit at the Argos chain.

About three-quarters of the decline in Argos’s sales was caused by the consumer electronics category, Ashton said. Sales of televisions were down 20 percent in the period and video- games dropped 25 percent, he said.

The decline in television sales at Argos was in line with the overall market, Ashton said. Argos is the biggest retailer of televisions in the U.K., selling 1.5 million units last year, or about one out of every five sold, he said.

“What has changed significantly over this period is that TV has got significantly worse,” Duddy said.

The CEO said the consensus analyst estimate for full-year earnings is likely to fall. Estimates of pretax profit for the year range from 170 million pounds ($280 million) to 230 million pounds, according to data compiled by Bloomberg, and an outcome at the lower end “is entirely likely,” Duddy said.

Argos’s gross margin narrowed by 0.75 percentage point in the quarter, Ashton said, hurt mostly by unfavorable shifts in currency rates. Discounting to clear excess inventory hurt profitability to a lesser extent, the executive said.

Home Retail also owns the Homebase home-improvement chain, where same-store sales rose 1.6 percent in the quarter. Gross margins at Homebase narrowed by 0.5 percentage point.

--Editors: Celeste Perri, Robert Valpuesta.

To contact the reporter on this story: Paul Jarvis at pjarvis@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.


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