Falling profit in first half fails to dent confidence at Argos group

Home Retail Group, owner of the Argos and Homebase chains, yesterday insisted it was well placed to deliver long-term growth in shareholder value as it revealed a slide in first-half profits.

Chief executive Terry Duddy argued that the company's scale, growing online offering, cost-cutting credentials and strong balance sheet would allow it to ride out the impact of government spending cuts.

Analysts fear that retailers heavily exposed to the mass market could be vulnerable to any downturn in consumer sentiment as cash-strapped low-income shoppers rein in their spending.

Recent surveys have painted a mixed picture when it comes to the health of the British high street.

"Although we're cautious in our outlook, we don't see things being terribly worse," stressed Duddy.

"One of the things that I'm very clear about is that Argos is in a very good place as far as the future of shopping is concerned," he added, noting that almost a third of the catalogue chain's business is now generated via the internet, with 1 per cent coming from a recently introduced iPhone app.

He issued the bullish outlook as the group posted an underlying pre-tax profit of 95 million for the six months to 28 August - a 23 per cent fall on a year earlier, though in line with management guidance of a 20 to 25 per cent decline.

There was a 3 per cent dip in overall sales to 2.7 billion, while the interim shareholder dividend was maintained at 4.7p.

Argos revenues were 6.5 per cent lower on a like-for-like basis, leading to a 4 per cent total decline in sales for the catalogue business at 1.8bn.

The group warned that while sales of smaller products, such as toys, were improving, demand for big-ticket items including furniture and technology products was suffering.There was a better performance at Homebase, where like-for-like sales slipped just 0.8 per cent to 855.3m.

Shares in Home Retail, which last month lost its place in the benchmark FTSE 100 index, have shed about a quarter of their value over the past year, underperforming a 2 per cent rise in the general retailers index.

Matthew McEachran, a retail analyst at Singer Capital Markets, said: "We remain cautious on the group's earnings prospects over the next 18 months given its overexposure to the UK mass market customer through Argos, the UK housing market through Homebase and the likely squeeze on consumer spending in 2011."

Freddie George, an analyst at brokerage Seymour Pierce, noted that the firm's strong cashflow and net cash of more than 300m could make it attractive to a private equity buyer.

Last month, Home Retail lowered its guidance for underlying pre-tax profit to between 250m and 275m for the year to the end of February 2011, from the 293m banked in 2009-10.

Duddy added: "The actual outcome as always will depend on trading through the peak Christmas period."

Argos currently has 749 stores in the UK, while Homebase operates 345 outlets.