Argos enjoys return to growth but parent Home still suffering

The catalogue chain reported a six per cent increase in underlying operating profits to £100.3m in the year to March 2.

This was in sharp contrast to the near 60 per cent fall the year before.

The group said it is on track to launch its first full digital catalogue before Christmas.

Despite Argos’s revival, parent company Home Retail, the UK’s biggest household goods retailer, posted a fifth straight fall in annual profits.

The group, which also owns the Homebase DIY chain, made an underlying pre-tax annual profit of £91m.

This was in line with analysts’ forecasts of £90m, but it was 10 per cent down from the £102m made in the 2011-12 year, which itself was a 60 per cent fall on 2010-11.

Group sales were broadly flat at £5.48bn.

Home Retail has been particularly hard hit by the economic downturn as its customers tend to be on low-incomes.

Retailers that attract higher income shoppers such as John Lewis have been far more resilient.

In addition Argos and Homebase are facing strong competition from supermarket chains such as Tesco and online retailers like Amazon.

Although Argos saw a rise in profits to £100.3m, this was less than half the £219m it made in the 2010-11 year.

The group pointed to an improving trend after three quarters of like-for-like sales growth, driven by robust demand for tab- let PCs.

Home Retail believes that a transformation plan, launched in October, to reinvent Argos from a catalogue-led business to a digitally-led business is starting to work.

Circulation of the print version of the catalogue, first launched in 1973, will be reduced and at least 75 stores will be closed or relocated over the next five years.

The group is targeting a 15 per cent rise in sales by 2018 with a focus on online, mobile and tablet sales.

At the 336-store Homebase business, operating profit more than halved to £11m.

The chain has struggled as pay freezes and job cuts have persuaded people to delay home improvement projects. Wet and wintry weather has also deterred shoppers.

Home Retail said it expects the 2013/14 financial year will be similar to 2012/13 with consumer spending hit by inflationary pressures and low levels of consumer confidence.

More customers chose to reserve products online to pick up in store, accounting for 31 per cent of all revenues, while smartphone sales now represent 10 per cent of trade.

The City expects Home Retail to grow profits for the first time since 2008 over the new financial year, forecasting underlying earnings of £100m.

But some analysts questioned if the revival can be maintain- ed.

N+1 Singer said that while self-help measures “cannot be ignored”, Argos is also being boosted by short-term factors, such as the collapse of competitor Comet and the recent surge in the tablet market.

“We remain cautious on the longer term outlook for the business, believing that management’s targets feel too optimistic,” they said in a note.

Analyst Philip Dorgan said: “While these results are clearly significantly better than we anticipated a year ago, we think that Argos’s turnaround will take too long and that Homebase is in danger of slipping into losses.

“We also believe that – as with many traditional retailers – Home Retail is making a virtue out of a necessity in that they are building a substantial store portfolio into an online model.

“Long term, we think that this will fail.”

Argos aims to maintain a store network of around 700, but 11 stores were closed in the last financial year and another 10 are due to shut over the next year.

The group is spending £800,000 on store revamps across the DIY business, while also improving its internet service and increasing brand ranges from retailers such as Laura Ashley and Habitat.

Home Retail said it was still in a strong financial position, ending the period with net cash of £396m.

The group plans to pay a full-year dividend of 3.0p, down from 4.7p last time.

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