Home Retail Warns Full-Year Earnings to Miss Analysts' Estimates

  • Argos owner cuts profit outlook on holiday disruption concern
  • Stock declines as much as 15%, steepest drop since May 2012

Home Retail Group Plc shares fell the most in more than three years as the retailer said earnings will miss estimates amid the prospect of increased Black Friday discounting.

The stock slumped as much as 16 percent as the owner of Britain’s Argos chain said a repeat of last year’s “almost unnatural” level of Black Friday orders may cause difficulties. Argos’s website was among many that struggled to cope with a surge in orders on Nov. 28 last year as the traditional American start to the holiday shopping season was embraced more widely in the U.K.

“We expect Black Friday to be big this year, there’s no question about that," Chief Executive Officer John Walden said on a call with reporters.“Last year we had an almost unnatural collection of orders to fulfill. If that happens again, that would potentially be disruptive."

Britain’s adoption of Black Friday in recent years has changed the way in which retailers approach the Christmas season. Walden said in January that companies will have learned from last year’s events, when the weight of online demand caused websites to crash, and police had to deal with disturbances at some stores as shoppers fought for bargains. Black Friday spending this year will increase 32 percent to 1.07 billion pounds, industry researcher IMRG said Wednesday.

Lowering profit expectations so far ahead of the holiday season indicates that Home Retail has looked at the probable pricing and promotion levels at Argos and “does not like what it sees," Tony Shiret, an analyst with Haitong Securities, said by e-mail.

Home Retail shares fell 13 percent to 130 pence as of 10:10 a.m. in London, extending this year’s decline to 37 percent.

Pretax profit will be slightly below the bottom end of analysts’ estimates ranging from 115 million pounds ($177 million) to 140 million pounds, the company said, also citing the costs of developing new store-collection and home-delivery propositions. It had earnings of 132.1 million pounds in the previous year, which ended Feb. 28.

Wage Pressure

Walden’s anxiety over Black Friday is something that’s not yet been echoed by other retailers. Yesterday, Asos Plc CEO Nick Beighton said U.K. shoppers had bought into the event in a “big way" and the company planned to offer similar levels of promotions to last year.

One reason for Walden’s concern is that Argos is unlikely to receive a comparable level of support from suppliers that some more customer-service orientated electrical retailers will get, John Kershaw, an analyst with Exane BNP Paribas, said in an e-mail.

Home Retail forecast that staffing costs will increase by 15 million pounds in its next financial year, with roughly 10 million pounds of that being as a result of an increase in the U.K.’s minimum pay requirements due to take effect next year. Walden said the company has yet to finalize its plans to mitigate the impact.

Doing so may be difficult, Jamie Merriman, an analyst with Sanford C. Bernstein, said in a note. Argos’s staffing levels are already “quite lean" and the chain’s key competitors, such as Amazon.com Inc. and AO World Plc, have less exposure to the legislation, she said.

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