Home Retail Surges on Surprise Boost From Argos: London Mover

Home Retail Group Plc, the owner of U.K. chains Argos and Homebase, rose to the highest price in 17 months after saying that accelerating sales growth at Argos over the holidays means full-year earnings will beat estimates.

Group underlying pretax profit will be about 10 million pounds ($16 million) more than the market consensus of 73 million pounds and Home Retail will have more than 300 million pounds of cash at the end of its fiscal year, the Milton Keynes, England-based company said in a statement today.

“We have been too harsh in our previous profit assumptions,” Philip Dorgan, an analyst at Panmure Gordon & Co. who has a sell recommendation on the stock, said in a note. “This is a much better than expected statement.”

The shares rose 12 percent, the biggest increase since June 19, to 136.6 pence, extending the gain over the past year to 49 percent. It was the best performer in the FTSE All-Share Index today.

The average 12-month price target of 18 analysts tracked by Bloomberg is for the shares to fall to 109.4 pence.

Home Retail will continue to “reinvent Argos as a digital retail leader” even as consumer confidence “remains subdued in the coming year,” Chief Executive Officer Terry Duddy said in the statement.

Like-for-like sales at Argos rose 2.7 percent to 1.74 billion pounds in the 18 weeks to Jan. 5, the company said today, a faster clip than the 1.6 percent growth in the 44 weeks to that date.

Tablet Computers

“Consumer electronics continued to deliver an improved sales performance driven by strong growth in tablets,” the company said. Growth in sales of appliances, toys and electrical items offset weaker demand for homeware and jewelry, it said.

Homebase, a seller of home improvement and do-it-yourself materials, had a 3.9 percent drop in like-for-like sales in the 18 weeks, better than the 5.4 percent drop in the first 44 weeks of the fiscal year.

Home Retail has the fourth-lowest stock recommendation on the FTSE All-Share General Retailers Index, based on analyst predictions compiled by Bloomberg. Twice as many analysts are sellers rather than buyers of the stock. Jamie Merriman at Sanford C. Bernstein reiterated an “underperform” rating today and said that while Argos may have been helped by the Comet chain going into administration, Home Retail shares may drop to 84 pence.

Still, the results are unlikely to make much difference to Argos’s longer-term prospects, said Dorgan, who has a 12-month price target of 80 pence.

“Argos’s competitors are too big, too nimble and its plans for change will take too long to implement,” Dorgan said. “ We believe that Argos will ultimately move into losses, but not as early as 2014, as we had previously expected.”

Income Squeeze

Home Retail may fall as much as 40 percent this year, more than any other U.K. retailer, Chris Chaviaras, a retail analyst at Barclays Plc in London with a sell rating and a 12-month price target of 73 pence, said in a note to clients yesterday.

That’s because the low income customers it targets will face continuing pressures on disposable income and the retailer will have to cut prices to compete with Amazon.com as it doesn’t differentiate on service, he said.

“If you don’t have service you are much better off not to have stores,” Chaviaras said in a telephone interview.

The volume of Home Retail shares traded was almost six times the three-month daily average.

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