Home Retail Group
Year’s revenues at Argos £4.1bn
Home Retail professes itself happy enough at the performance of Argos and Homebase since the start of the year. Both went into like-for-like sales decline, but both, the company says, were up against tough comparators in the same period last year.
The market seems unconvinced. The shares lost 21½p to 174p, with analysts questioning why sales at Argos, in particular, should have gone into reverse as the chain introduced “improved customer experiences” that should have had the reverse effect. Meanwhile, the reduction in margins at Homebase was significantly worse than had been feared.
Argos saw some weakness in sales of electronics products, as against the start of 2014, when various new games consoles came on to the market and sales of tablets were stronger. This, paradoxically, will have had the effect of enhancing margins across the chain, because these are low-margin products in a competitive market.
Homebase was competing with the flood-stricken first couple of months of last year, which boosted sales of water pumps and DIY goods to keep the water out.
The Home Retail board has a clear enough strategy at both chains. Homebase is shrinking its stores from 320 to 240 over a three-year period, a process that will contribute to that margin deterioration as excess stock is cleared. Argos is increasing the number of outlets while looking at home deliveries and other improvements.
The latter is well advanced in reaching the target of £4.5 billion in sales and operating margins in the mid-single digits, though the experience of the start of the year suggests that there may be the odd slip on the way.
It is increasing the percentage of internet sales and of those ordered on mobile phones.
That progress means that pre-tax profits for the year to the end of February will be at the top end of the market’s range of expectations, £120 million to £132 million. It is hard to fault the actions taken so far, but both chains look like they are anchored firmly in the mid-market segment that is taking most of the pain on the high street.
The shares sell on 15 times earnings, which makes it hard to summon up much enthusiasm for a purchase even at this level.
My advice Avoid for now
Why Management actions at both chains seem sensible, particularly shrinking Homebase, but real progress looks to be slow from here
Fenner
Cut in cash costs achieved £9m
Figures from Fenner are always worth looking at because the company has the misfortune to be exposed to the world mining cycle, through the conveyor belts it is best known for, and to oil and gas, through the seals made by its advanced engineering products side.
Both are heading in the wrong direction, and Fenner says that figures for the current year to the end of August will come in “moderately” below market expectations. Orders from oil and gas companies have fallen off rather faster than had been expected in recent weeks, and the Australian mining industry is seeing lower orders of belts, after some months of pressure on prices, as companies there finally bite the bullet and look at taking out some production.
Fenner has done all it can to cut its costs accordingly, but any recovery in orders is still a long way off. Even US coal, a big user of those belts, is under pressure because of the low gas price.
The shares, pushing 500p at the start of last year, fell 7¾p to 192¾p. They sell on 11 times earnings, but the saving grace is the dividend yield, now well above 6 per cent. This puts some support under the shares, even if any recovery still looks muted.
My advice Hold
Why Shares have fallen far enough, given the yield
Asos
Halfway sales £550m up 14%
Shares in Asos, investors will not need me to tell them, are wildly erratic. They were above £70 a year ago. Yesterday, up by a fifth at one point, they ended 423p higher at £37.02 on second-quarter figures that showed some resumption of the early heady growth rate and signs that the company is coming to grips with the issues that made them a disappointment last year.
These were mainly down to a sharp decline in the rate of growth from international sales. Asos lacked the ability to alter pricing to take account of foreign exchange movements in areas such as Australia that were making its clothes and footwear uncompetitive, and some had to be sold in the UK at a discount. New IT systems now allow this to be done. International sales grew by 12 per cent in the second quarter to the end of February, against a 30 per cent rise from the UK.
Cost cuts will have the inevitable effect on margins, but an acceleration in sales growth across the group in the quarter makes Asos confident enough to guide towards a 15 to 20 per cent rise for the current year. The company had slackened off on marketing spending while it brings prices into line, though the frequency of orders from existing customers and the size of spend were both up. It has the benefit this year of a fully automated distribution centre in Barnsley, while a “Eurohub” is being built in Berlin.
On any sensible metric the share price makes no real sense. The shares change hands on more than 90 times earnings; they may rise further, but any purchase looks a straight gamble.
My advice Avoid
Why Shares are erratic and could go anywhere
And finally . . .
There is a curious spat going on at ADVFN, quoted on AIM, where an Israeli entrepreneur has gathered a near-7 per cent stake and is trying to have the entire board thrown out. An earlier attempt seems to have failed on technical grounds, but another will follow. The company and its advisers are refusing to comment or give any but the sketchiest details. Students of irony might note that ADVFN is an online website that claims to be in the business of providing useful data and insights to private investors.
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