Home Retail Group: not yet home and dry

Home Retail Group's sales have proved better than many expected. Homebase has reported like-for-like growth of 3.8%, after more than a year of significantly negative decline, and Argos's like-for-likes have improved greatly, at -2.8%. In terms of total sales, Homebase achieved growth of 5.8% and Argos of 0.9% in the 13 weeks to May 30, due to the opening of three and five new stores, respectively.

As well as an increase in total sales, the crucial multi-channel constituent of Home Retail Group's sales also showed strong growth. Indeed, multi-channel sales now account for 42% of total Argos sales, with its online 'Check & Reserve' channel growing by 45%. However, on further investigation, any heralding of a full-on recovery would be premature to say the least.

This latest performance comes against dire comparatives, with Homebase registering a massive like-for-like decline of 12.0% in its corresponding statement last year, and Argos having been flat. Homebase, in particular, was given a boost by the weather, with the warmer climate of March and April contrasting favorably with last year. This drove sales of gardening and outdoor products and, with seasonally related categories accounting for around 40% of first quarter sales, low double-digit growth in these areas was enough to drive strong performance overall, with other categories underperforming even their dismal performance last year.

Argos's sales were propped up by robust sales of consumer electricals, with toy sales benefitting from the exit of Woolworths from the market. However, sales of larger homewares and furniture items remained poor. This situation is mirrored at Homebase and is unlikely to change until the housing market picks up, which Verdict Research is not predicting until the end of 2010.

With unemployment continuing to rise, sales of consumer electronics are likely to be heavily impacted in the medium to long term. In addition, Argos has to deal with the threat of the grocers. With a significant proportion of its shoppers already using Asda and Tesco for food shopping, the planned roll-out of non-food, Argos-style kiosks by these two retailers is likely to have a significant impact on Argos's sales.

Margins are also falling, with 75 and 250 basis point gross margin declines at Argos and Homebase, respectively, largely as a result of the changes to sales mix and the weakness of the pound pushing up import costs. However, the group will focus on cash gross margin and achieving further cost efficiencies, and against such weak comparatives its sales are unlikely to deteriorate much further. Nevertheless, any meaningful and sustainable recovery remains some way off.

Source: Verdict Research

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