Home Retail Group - struggling for relevance

Home Retail Group: I have been quite dismissive of Home Retail in the past, but FY2015 pre-tax profits up 14%, eps up 25% and a 15% dividend hike seem to merit a re-visit. The two operating divisions of Argos and Homebase have both made progress this year. At Argos, operational milestones include the roll-out of same day collection, with 46% of sales now on-line. LFL sales were up 0.6%. At Homebase 27 net store closures left them with 296 (on route to around 240 by FY2018) and generated cash in the process. LFL sales were up 2.3% and they now have Argos concessions in 20 stores and Habitat (an in-house brand nowadays) in 35. Year-end cash balances were a healthy £309.3m, albeit down on £331.0m a year ago.

However, something still nags. Pre-tax profits were up £16.7m to £132.1m, but £14m of that was due to cost cutting. Part of the Argos success has been the growing use of digital stores for click’n’collect, but there are many others looking at more tailored delivery options or local click’n’collect services. The Argos experiment with click’n’deliver seems reactive as much as anything. In addition, building new capabilities onto an existing IT architecture is proving tricky at times. The digital stores are as much a defensive move as a mould breaker. Whilst Argos offers over 53,000 products, that is in a world where the Amazon platform sells almost everything. Elsewhere, as rival, and market-leader, B&Q re-boots to cope with a mature and over-spaced UK DIY market, so Homebase struggles to resonate with shoppers. The increasing use of concessions is as much an admission of defeat as an exciting new retail offer.

Looking ahead, they say that first half trading will be ‘more challenging’ at Argos as they come up against strong LFLs a year ago, with the quarterly trend in LFLs already losing momentum markedly. There is also an implication is that the 2018 transformation plan for Argos is running behind schedule. The slowdown in LFLs is also seen at Homebase and, across the group, they will ‘assume only low levels of market-driven growth’. If they maintain eps at 13p, then at 167p, the PE is 12.8x. With cash on the balance sheet further dividend progression is on the cards, but even a 10% jump to 4.2p is only a yield of 2.5%. The shares look a bit cheap, but I still fret that, if Home Retail didn’t exist, you wouldn’t invent it. (Neil Cumming^, 29^th April 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