Bright times for Home Retail Group

Home Retail Group surged (up some 6% at time of writing) following its announcement today that profit for the year would be better than expected as the company’s Argos and Homebase businesses deliver strong performance.

Pre-tax profit for the year, the company said in its latest trading statement, would be “slightly ahead” of the top end of its current range expectations of £107m – £111m.

At Argos, total like-for-like (LFL) sales grew by 5.2% to £526m in the last eight weeks of its fiscal year (ended 1^st March); predominantly driven by decent demand for electrical products such as video games, TVs and white goods.

With decent growth across all product categories, total LFL sales at Homebase came in at £203m in the period – that’s an increase of 9.3%.

But the cloud of on-going Payment Protection Insurance (PPI) mis-selling lingers.

As a reminder: an investigation launched by the Financial Conduct Authority found that PPI policies were widely mis-sold, which means that people who bought them may be able to claim a refund.

As a result, Home Retail anticipates increasing its existing PPI provision by around £25m – the charge is set to be recognised in the current fiscal year.

Still, turnaround efforts seem to be bearing fruit.

Following dwindling performance at Argos a few years back, Home Retail embarked on a turnaround plan. The plan included turning Argos, which makes up the bulk of the company’s revenue (more than 70%), into an online player.

Those efforts have certainly gained traction, with internet sales now representing around 44% of total Argos sales. As a subset, its mobile commerce push also seems to be paying off, now representing 18% of total sales.

Meanwhile, a refurbishment of Homebase stores, which sells home furnishings and similar, has been underway as the company looks to drive sales by differentiating itself.

With no debt and £300m cash, the company’s balance sheet certainly looks strong enough to support its continued efforts across both businesses.

And let’s not forget there are more benefits to come for Homebase, from the recovering UK housing market.

Indeed, if news flow from housebuilders – the likes of Barratt Development and Taylor Wimpey – is anything to go by, home buyer demand is in abundance, partly thanks to government help for would-be homeowners (called Help To Buy).

That’s not to say that Home Retail’s businesses are immune to adverse conditions that affect the overall retail sector – turnaround efforts notwithstanding. Not to mention tough competition, for Argos in particular, from larger players with substantially more resources (Amazon.com comes to mind).

But on balance, particularly given steady progress, there is merit to the market’s optimistic view of the company.