Argos vulnerable after 11% dive in profits?

Argos owner HRG stays tight-lipped on takeover speculation, but looks exposed as profits slide.

Last Updated: 20 Oct 2010

Argos owner Home Retail Group said this morning that pre-tax profits dipped 11% in its last financial year – a reminder of how just tough things have been for many high street retailers. Underlying profits fell to £293m for the year to 27 February, down from the previous year's figure of £328m, which HRG blamed on the price of imports and falling confidence. After a week in which the group has been subject to much speculation about a takeover bid from a rival retailer, that's not exactly the kind of message you want to be giving your shareholders...

In fact, today's results would have made pretty grim reading for HRG investors (hence why the share price promptly plunged). The real headache for HRG has been Argos, where profits were down £37m. Although sister company Homebase actually fared pretty well, with operating profit up by £26m (a whopping 177% increase), this wasn’t enough to offset the Argos shortfall.

So what went wrong? HRG put the disappointing figures down to the fact that both household spending and consumer confidence had been ‘severely hit’ in the past year (tell us something we didn’t know). It also said that the bottom line had suffered due to the weakness of sterling, which meant it had to pay a lot more for the goods it imports from outside the UK (i.e. the vast majority of its stock).

Then again, things could arguably have been a lot worse – chief exec Terry Duddy reckons the results for both chains ‘exceeded initial expectations’. And the financial picture would have been much bleaker had it not been for HRG’s efforts to reduce its overheads, which included making redundancies at head office and slashing shop workers’ hours. (Good for shareholders, not so good for Argos staff.)

Duddy's problem is that Argos is trying to swim with some very big fish - notably giant supermarkets Asda and Tesco, who are both trying to grow their non-food offerings. Earlier this month, Asda announced a lofty ambition to become Britain’s largest non-food retailer by 2015 - but Duddy tried to play down the competitive threat today, suggesting Asda's plans were based on expanding its George clothing and homewares business. Neither of which is really Argos’s cup of tea.

But it's the relative scale of Argos that has left it open to all this takeover speculation. Duffy refused to be drawn today on stories that the group was being targeted by potential bidders (including Asda), but he did rule out spinning off Homebase: this was not an option, he said, because it bolstered the group’s buying power (not to mention the fact that it’s the only part of the business that’s making money.) But there’s no doubt that numbers like these leave Argos more vulnerable to a takeover bid. Watch this space.

In today's bulletin:

Will 10% house price jump boost Gordon Brown in leaders' debate?
Argos vulnerable after 11% dive in profits?
John Vincent: Does the 'bigot' comment matter?
Private sector will prop up the job market, says CIPD
Equal pay in Birmingham - a mixed blessing?

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