Argos revamp long overdue but investors may have longer to wait
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Version 0 of 1. Home Retail Group's review of its Argos business took six months to complete but should have happened five years ago. The broad conclusion - be a "digital-led" retailer - is uncontentious but could have been adopted in 2007, when Argos's profits were a fat £376m and the coming revolution in shopping habits was already obvious. Even five years ago, 16% of its sales were arriving via the internet. The figure is now 42% but the company still prints 17m copies of its brick-sized catalogue twice a year. That nonsense will now be reined in. Instead, £100m will be spent each year for the next three years to upgrade IT systems to cope better with the full set of digital devices. As overhauls go, £300m sounds reasonable for a business with a sales base of £3.9bn. Will it work? In theory, the targets are pedestrian - push sales up to £4.5bn and achieve a "mid single digit" profit margin. At a 5% margin, that would imply operating profits of £225m, or three times the miserable £75m-ish expected this year. We'll believe it when we see it, seems to be the City's view. One can understand why. There is the real possibility that Argos' self-help measures, even if executed well, will prove popular with the punters but take ages to improve the lot of shareholders. That is roughly where Dixons, another high street name forced to adapt to the digital age in a hurry, finds itself. The problem for both chains is that the non-food multi-channel jungle is populated by big beasts such as Amazon and the supermarkets making chunky investments. The squeeze is on. Still, there's no doubt that Home Retail has the cash to give it go. It generated £122m in the first half of this financial year and had net funds of £316m on 1 September. Rather than a mass-cull of stores, chief executive Terry Duddy prefers the opportunity to screw better terms out of its landlords as leases expire; that seems a reasonable plan (much better, for example, than his unforgivable squandering of cash on share buy-backs in 2010, ahead of a share price collapse). And, for the first time in half a decade, Argos' like-for-like sales have stopped falling. There is still hope. |