Home Retail provides home for investors

Appealing to the less affluent and budget-stretched shopper is not exactly unusual for the company as it has long pitched its products as this end of the market and it should therefore continue to enjoy some insulation from the current economic slowdown.

But such is the ferocity of the downturn that even Argos has this week reported weaker-than-expected numbers for the second quarter (13 weeks to August 1) with a 5.8 per cent like-for-like decline, compared with flat sales in the first quarter.

Sister chain Homebase reported an even-more severe 8.3 per cent fall, which should not be that surprising considering the parlous state of the housing market - in a nutshell, those who chose to cancel moving home have now also abandoned spending on their existing property because they are so strapped for cash.

Although anecdotal evidence (at one North London Homebase) shows there are still queues at the checkouts this might be more down to the limited number of employees on the shopfloor at this particular branch. Cutting staff numbers has undoubtedly benefited the top line at Argos with Shore Capital suggesting the company has a strong record of under-promising and over-delivering in the department of cost reduction.

More such cuts are likely to be much tougher to find in the second half and, in terms of trading, management admitted in its second quarter statement that pretty much across all categories Homebase is having a tough time.

While this is not exactly surprising, what was much more unexpected was the news that a reduction had been made in the value of the Homebase business on the group's balance sheet (mainly the goodwill element) by around £500 million.

However, the main focus for the City is Argos (as it represents two thirds of Home Retail overall sales) and the division has performed particularly well in the electronics category where it has delivered more impressive numbers than specialists Kesa and DSG.

Unfortunately this has been more than offset by the continued poor trading in furniture and homewares, which is a core part of the Argos mix and firmly puts it in the domain of the big ticket retailers. This is a grouping that has been hit particularly hard of late.

But despite this, Home Retail remains the preferred play in the big-ticket discretionary end of the market for Investec Securities. This is based on the arguably good long-term story that the company has to tell and its share price of 221.75p (having recovered from an initial fall of five per cent on the back of the second quarter results) that puts the company on a modest PE of 8x earnings for 2008.

This is a fall from the heady heights of 430p in October but over the past quarter the shares have performed reasonably well with a gain of approaching 10 per cent. This will have been well received in the City where the consensus opinion is that Home Retail is a share to have in the back pocket.

One appealing aspect is management's ability to keep on top of events where multi-channel developments are concerned. Whereas many retailers have failed to grasp the opportunities that technology can provide, Argos' big cheeses have been receptive to adopting new methods. Its online 'Check & Reserve' orders, which involve buying on the internet and collecting in-store, now account for an impressive 13 per cent of total Argos sales.

If you believe the future of retail involves multi-channel trading then this figure will likely grow and is one of a number of factors that mark Home Retail out as one of the stronger players in the sector.

glynnd@theretailbulletin.com