Home Retail - a Woolworths for our time?

Home Retail: They seem to be a good example of what is silly about the latest US import: Black Friday. All it does is to suck in sales around that day, at the expense of margin and the risk of poor fulfilment. In the case of Argos (about three quarters of group turnover), Black Friday sales were up 45%, with a threefold increase in digital hits to 13.5m. After the distortion of Black Friday, they then decided to protect margins, at the expense of sales, through the Christmas season. This meant that LFLs over the 18 weeks to 3^rd January were +0.1% against expectations nearer 2%. However, margins fared better, being flat YTD (44 weeks) but up 25bps over the 18 weeks. At Homebase (the other quarter of sales) the managed decline continues, with more stores having closed and more to be closed. The resultant clearout of stock explains a 100bps margin drop over 18 weeks, with LFL sales up 0.6%. On the face of it this is worse than the 44 week data showing LFLs up 2.9%, with a lower 75bps margin drop. Overall the group states that pre-tax profits are still in line with consensus expectations.

For the year to 28^th February 2015, these expectations are for 11.7p of eps, making a PE of 17.1x after the markets’ reaction took the shares down to 200p. On a 3.54p dividend that is a yield of 1.8%. A year out some growth to eps of 12.7p and a dividend of 3.93p is forecast for a PE of 15.8x and a yield of 2.0%. These are not startlingly cheap for a group still trying to find its new role in a bricks and clicks world. I noticed before Christmas that Argos is using pop up click and collect sites, but that seems rather like a pea-shooter against the raw power of Amazon. As for Homebase, it might be summed up well by the Tunbridge Wells store, which sits forlornly, all peace and quiet, providing extra parking spaces for the Sainsbury with which it co-habits. Home Retail’s struggle to find a place in a new retail world seems all too reminiscent of Woolworths in the 1990’s. Overall this stock still doesn’t do it for me. (Neil Cumming^, 16^th January 2015)

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  Twitter:  @DividendPower