Home Retail won't cull Argos stores after profit slump

LONDON Wed May 2, 2012 12:05pm BST

A pedestrian passes a branch of Argos in, central London October 19, 2008. Home Retail Group owns Homebase DIY chain and the 720-store catalogue-based retailer Argos. REUTERS/Andrew Winning

A pedestrian passes a branch of Argos in, central London October 19, 2008. Home Retail Group owns Homebase DIY chain and the 720-store catalogue-based retailer Argos.

Credit: Reuters/Andrew Winning

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LONDON (Reuters) - Home Retail (HOME.L), Britain's biggest household goods retailer, said it will not embark on a policy of mass store closures at its Argos business after it posted a 60 percent slump in year profit and scrapped it dividend.

The owner of catalogue-based Argos stores and Homebase DIY chain said it remained cautious about the consumer outlook, adding it was operating in a particularly difficult trading environment with its cash-strapped consumers bearing the brunt of the economic downturn.

"Prospects for the 2012/13 financial year remain uncertain as consumers' disposable income is impacted by ongoing inflationary pressure, together with low levels of consumer confidence," Chief Executive Terry Duddy said.

He said there "will not be an en masse store closure programme announced in the near future", adding only seven of Argos's 750 stores were not making a profit. Nearly 90 percent of sales come through stores at some point.

"It would not make any sense to close stores which are currently making us money," he told reporters.

Instead, the firm was only likely to close ten Argos stores over the next financial year, relocate several more to better locations and focus on selling goods to customers via multiple channels, including through mobile phones and the internet.

"We have got 300 or so stores coming up for lease renewal or lease break over the next five years or so. Each of those stores, at the point the lease renewal comes up, will be reviewed," Duddy said.

Analysts remained unconvinced.

"We believe that Argos will need a significant store closure programme, as it shifts towards clicks, rather than bricks, it will need to match Amazon (AMZN.O) on price and it will probably need a rescue rights issue to finance change," said Philip Dorgan, analyst at Panmure Gordon.

American John Walden started as Argos's new managing director last month and has been given a free rein to examine all options for the struggling business.

PROFIT SLUMP

The firm made an underlying pretax profit of 102 million pounds in the year to February 25.

That compared with analysts' average forecast of 100 million pounds, according to a company poll of 23, and 254 million pounds made in the 2010/11 year.

Total sales fell 6 percent to 5.49 billion pounds, with sales at Argos stores open over a year down 8.9 percent and like-for-like sales at Homebase stores down 2.0 percent.

Home Retail shares, which have lost half their value over the last year, were down 9.8 percent at 91.12 pence at 1011 GMT, while the FTSE 250 midcap index .FTMC was flat.

Many retailers are struggling as consumers' disposable incomes are squeezed by rising prices, muted wages growth and government austerity measures, and as they fret about job security and a shaky housing market.

Argos has been particularly hard hit because its mainly low-income customers have suffered most in the recession and because it also faces stiff competition from supermarket chains, specialists and internet players like Amazon.

"Argos faces both cyclical and structural pressures and whilst the former may begin to ease, we think a solution to the latter is yet to be presented," said Richard Cathcart, analyst at Espirito Santo.

But Duddy pushed back on suggestions that the company's falling profits are due to structural problems with its Argos stores, saying the pressure on sales is mainly due to a decline in spending power by British consumers.

"We have to keep moving and getting better but the major issue here is the market and economy issue," he said.

(Additional reporting by James Davey; Editing by Mike Nesbit)

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