Home Retail shares fall on FTSE 100 as Q1 sales decline

Shares in Home Retail fell over four per cent on the FTSE 100 after the group announced a fall in sales of both its Argos and Homebase stores in the first quarter.

In the 13 weeks to 29 May the group said that total sales at its Argos stores fell 5.2 per cent to £889 million. On a like for like basis sales dropped 8.1 per cent.

During the quarter two new Argos stores were opened, taking the total number of Argos stores to 747.

The group said that sales of computer games and TVs were particularly weak in the period and contributed to two thirds of the fall in sales. However sales increased in PCs, white goods and toys.

Internet sales accounted for 32 per cent of Argos' sales, up from 28 per cent in the same period in the previous year.

The group's Homebase stores also saw both total and like for like sales drop 1.4 per cent in the quarter to £459 million.

Two Homebase stores were closed during the quarter, taking the number of stores down to 347.

Home Retail said that sales were flat at Homebase in the quarter, compared with double digit growth in the previous year, which was accounted for by good weather in spring 2009.

The group said that so far its £150 million share buyback programme had seen the group buy 20,990,000 shares at an average price of 256 pence per share with a net cash outflow of £54 million. The purchased shares represent 2.4 per cent of the groups 877.4 million shares issued at 27 February 2010.

Terry Duddy, Chief Executive of Home Retail Group, said, "Economic conditions remain both challenging and uncertain, with this quarter proving difficult in terms of consumers' willingness to spend. The comparable period last year also contained some strong sales growth and share gains in certain product categories, particularly in consumer electronics at Argos. For Homebase, this quarter represented a good outcome to its peak trading period.

"We continue to drive cash gross margin, further cost efficiencies and our increased investment plans. At this early stage of the financial year, we are targeting to achieve a similar level of profitability to last year."

Richard Hunter, Head of UK Equities at Hargreaves Lansdown Stockbrokers, commented, "This somewhat underwhelming update has seen a corresponding dip in the share price in early trade.

"Any good work from the Homebase unit was unfortunately more than offset by weakness in the Argos division. With the likelihood of an austere Budget pending, the current pressure on the company's higher margin products is likely to intensify. Furthermore, the arrival of new competitors to the UK adds to an already fiercely competitive marketplace. On the upside, the cost containment programme is progressing and the share buyback scheme continues apace. The shares are also currently yielding around 6.5%, which is an attraction to income investors given the current interest rate environment.

"In all, though, investors remain uncertain about Home Retail's ability to prosper sufficiently during difficult times. The shares have given up some 21% over the last six months, during which time the wider FTSE100 has lost just 3%. Even over the last year - and despite a move by investors at one point into early cyclical stocks - the shares have dropped 8% versus a FTSE gain of 14%. The current market view of the shares is unlikely to improve from the current hold status."

By 10:16 shares in Home Retail Group were down 3.82 per cent on the FTSE 100 to 228.90 pence per share.