Argos’s catalogue of missteps slams Home Retail shares

<p>A frenzy of discounting among UK retailers has backfired badly for two high-profile shop chains in the last couple of days, sending their shares spiralling downwards. […]</p>

A frenzy of discounting among UK retailers has backfired badly for two high-profile shop chains in the last couple of days, sending their shares spiralling downwards.

Home Retail Group, which owns high street ‘catalogue’ shop chain Argos, was the latest to see massive discounts explode in its face.

Its shares traded as much as 8.5% lower on Thursday as investors reacted negatively to the margin impact from its promos.

Home Retail also owns DIY chain Homebase.

At Argos, sales growth was virtually flat between 13th August and 3rd January, even though sales were catapulted 45% higher on ‘Black Friday’ versus comparable days.

13.5 million customers visited Argos online. That’s triple the number from the year before, the company said.

Despite the surge, Home Retail said pre-tax profit for the year ending in February would be in line with expectations, but Argos and Homebase Christmas missed targets, the company said.

Home Retail seemed concerned about the effect that unprecedented promotional price cuts on ‘Black Friday’ late in November might have on trading as Christmas drew nearer.



Home Retail stopped discounting, but it was too late

In response to those concerns, Home Retail said it had taken a much more cautious approach to discounting in the period after the one-day sales drive in November.

Home Retail’s CEO suggested the group’s decision had in fact saved it from a worse outcome from Christmas trading.

“It would (have been) easy to get into a position where everything is on sale and everything gets cherry picked and you end up with a real profit problem and that was the challenge we tried to avoid,” John Walden said at a press conference.

Later the firm reiterated during a conference call with analysts that it continued to expect group profit before tax for its current year ending in February to be in line with the market consensus of £127m.

Either way, investors were not pleased and its stock still closed with a significant loss of 6.1%.

Let’s face it, its missteps during the most important selling period of the year led to the group over-reaching itself and at best, all that can be salvaged is pre-tax profit of £127m.

(In fact, in the wake of Home Retail’s statement today, consensus forecasts have been trimmed to £122m.)

The earnings hit may concentrate investor minds about HRG, when it’s considered against close peers which are expected to return 3.3% in terms of prospective yield—Home Retail’s forward yield is 1.9%—and even 4% if we take in Marks & Spencer to the group.

The latter trades on a more modest 13.5 times forward price/earnings ratio, versus 16.7 by HRG.

Home Retail stock almost avoided the magnetic compulsion of an important moving average today, though after a spike in volume activity bigger than any visible since January 2013, and as momentum indicators invert, it seems the share will trend lower from here.



Zooming out to the weekly view, there was already suggestion of a confluence of overhead coming up, including an important 61.8 retracement mark of the fall from 2007 highs to lows of about 85p.



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