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Argos sales threaten Home Retail profits Argos sales threaten Home Retail profits
(about 5 hours later)
Home Retail Group, target of a £1bn bid approach from Sainsbury’s, has warned that poor sales at its Argos chain would hurt group profits. Home Retail Group’s boss, John Walden, has insisted the company does not need a takeover despite warning that poor sales at its Argos chain would hit profits.
Argos posted a 2.2% fall in like-for-like sales in the 18 weeks to 2 January, worse than analysts had expected. Sales at its stores slumped 13% in December, with shopping centre and high street stores badly hit, which was only partly offset by 10% growth in digital sales. The group, which was the target of a £1bn approach from Sainsbury’s, revealed a 2.2% fall in sales at established Argos stores in the 18 weeks to 2 January. Analysts had forecast a 0.3% rise.
A 10% rise in online sales in December failed to offset a 13% slump at the Argos store chain, as sales of games consoles, large kitchen appliances and jewellery declined.
Related: Thousands of Argos jobs at risk if Sainsbury's deal is struckRelated: Thousands of Argos jobs at risk if Sainsbury's deal is struck
Home Retail’s other chain, Homebase, enjoyed 5% growth, boosted by kitchen and bathroom products. The company confirmed it is in advanced discussions to sell the DIY chain to Australia’s Wesfarmers for £340m. Profit margins also fell by more than 2 percentage points, with Argos selling more items at a discount as a result of the rising popularity of the Black Friday promotional period.
As a result of Argos’ poor performance, the firm said full-year profits will be at the bottom end of City forecasts, which range from £92m to £118m. The group’s DIY chain Homebase, which is to be sold to Australia’s Wesfarmers for £340m in a deal announced late on Wednesday, reported a 5% rise in sales at established stores, bolstered by purchases of kitchen and bathroom products.
Consultants Retail Remedy tweeted: “Re-modelled estate, footfall from Sainsburys, more digital ... there’s still a case [for a takeover by the supermarket group].” Home Retail said profits for the group would now be about £92m, the lowest end of analysts’ expectations and about 10% below the average forecast. Walden also made clear that Argos had seen the strongest performance at its concessions, most of which are in Homebase stores, and that these may be closed within 18 months under the terms of the deal with Wesfarmers.
Chief executive John Walden described it as a “very eventful period for the group”. Despite the poor performance, Walden insisted Argos was a “strong business”. He added: “The capabilities we are building are going to play into the digital future. We are not feeling we would be a weaker business [if Homebase is sold] but a stronger business with an improved balance sheet.”
“Against this backdrop, whilst Argos trading performance was mixed, I am pleased that we made material steps forward in the Argos transformation plan,” he said. He said the sale of Homebase would give the group cash to invest in updating Argos’ stores and delivery systems. “We don’t need a tie-up,” he said. “We feel we good about what we are building and know what we are becoming is of value.”
Total sales at Argos increased 0.9%. Walden said trading was volatile, highlighting a surge in sales during Black Friday week and a slowdown in the weeks before and after, growth in digital transactions, reduced store footfall particularly on the high streets, and further price cuts. He said Argos had proved that the idea of concessions in other stores worked and that it would be able to find alternative partners if Homebase, or Sainsbury’s, pushed it out.
Walden added that Argos had outperformed rivals in the markets it traded in and insisted its systems had coped well with a huge surge in sales on Black Friday – when sales were up 41% on last year.
But Tony Shiret, an analyst at Haitong Research, said the longer-term economic rationale for the Sainsbury’s buy-out of Argos “should theoretically have been damaged by the trading results” and that the supermarket’s shareholders were likely to want to pay a low price to compensate for the risk of a deal.
Sainsbury’s has until 2 February to return with a new bid for Home Retail but has made clear it is only interested in the Argos chain.
The likelihood of the company making a new offer had appeared to increase on Wednesday night when Home Retail announced it was in advanced talks on the sale of Homebase to Wesfarmers. Analysts said it was difficult to assess the potential effect of the sale of Homebase on the price Sainsbury’s might have to pay to win over Home Retail shareholders.
The supermarket is expected to have to pay at least 160p a share, or £1.3bn, while some shareholders have indicated they would not accept less than 200p.
The sale of Homebase makes Home Retail potentially more attractive, as Sainsbury’s has made clear it is not interested in the DIY chain and the sale of the chain’s leases would help reduce the group’s net debt from £1.5bn to just £13m.
But the probable loss of Homebase also reduces the prospects for profits at Argos by as much as £20m because of the likely closure of nearly 100 concessions within Homebase stores and it would eventually have sole responsibility for head office and operational costs that were shared between the two businesses.
Shiret said the most important aspect of Argos for Sainsbury’s would be the potential value of the cost savings it could realise through the merger.