Home Retail Group - I can hear a chainsaw

Home Retail Group: When you have a lot of bricks and your business is threatened by the clicks of the internet retail revolution, life is tough. If you are Argos then a large secondary High Street estate, based on paper catalogues became a horrible place to start. Then you add in Homebase, which used to aim for ‘aspirational’ but has long lost any pzazz and life is tough. In fairness to Home Retail they have made a good fist of managing change, under the leadership of the now departed Terry Duddy. The estate is slimmer, the paper is being replaced by tablets and their version of ‘click ‘n’ collect’ has been added. Over recent years, Homebase seemed to have reached the status of a relatively pain free managed decline, but today we were treated to the noise of the corporate chainsaw revving up again.  

In the interims to August 2014, pre-tax profits were up 13%, but were shy of forecasts with an expected £20m increase in operating costs being more front end loaded than expected, with £15m incurred so far. Argos saw a +2.9% like for like sales lift with gross margins being maintained. Electricals and the like performed better than soft furnishings where more range work is needed. Overall, internet sales are now 43% of the total so they have come a long way in recent years. At Homebase like for like sales were up 4.1%, but there was another hit to gross margins, this time being -75bps. The company has announced that 25% of the remaining stores will be shut by 2018, albeit most are in a long tail that the group seems to have stopped loving some time ago. Frankly, few will miss them. At 178p, a slightly optimistic consensus of 11.5p eps for February 2015 is a middling PE of 15.5x. The interim dividend is held at 1p in line with policy to put through any changes at the finals. If the 11.5p is made, then the total dividend could be 3x covered at 3.8p to give a modest yield of 2.1%.  Meanwhile, against a market capitalisation of £1.44bn, the balance sheet sports a healthy £333m of cash, up £2m over the period, but down from £412m a year ago and the NAV is stated at 348p.

The bottom line is that if Argos and Homebase disappeared, they wouldn’t be missed for long. There are almost echoes of Woolworths’ long goodbye in all this, although the cash and NAV do provide comfort that such a brutal disappearance is unlikely for now. If you like the shops then this may all seem like a store of value, but with little positive momentum in the business, I would rather shop elsewhere.   (Neil Cumming, 22nd October 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk