Argos profits slide ahead of Sainsbury's takeover in 'lacklustre' market

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Home Retail Group has revealed a 36% slump in profits at Argos ahead of its £1.4 billion takeover by Sainsbury’s.

The company said sales in Argos stores open for more than a year had slipped 2.6% in its recently ended full year as strength in toys, sports equipment and furniture failed to offset weakness in electrical products, which account for more than half of sales.

“We would have expected sales to accelerate during the year, but sales were ok. Electricals had a difficult year in the market; TVs were 6% down in the market and other categories had cyclical issues,” chief executive John Walden said.

The bigger issue, he added, was the pressure on margins by increased promotions, while the costs of revamping stores and opening new “digital” ones had also hit profits. Argos’ operating profit slipped to £83.1 million from £129.2 million.

The store overhaul is part of a five-year transformation plan for Argos, which has also involved cutting costs and implementing its Fast Track same-day delivery service.

“There is work to be done (at Argos) but many of the building blocks are now in place.”

Home Retail boss John Walden

Walden said the makeover had coincided with a deterioration of conditions on high streets, but the changes would prepare the chain for the future.

“It is true that the market is not robust at the moment, it’s fairly lacklustre… which could relate to the EU referendum or challenges at the back half of the year as footfall (declined) and business shifted online.

“People who are not adequately participating in digital will be at a disadvantage. There is work to be done (at Argos) but many of the building blocks are now in place.”

Walden confirmed the takeover by Sainsbury’s was on track to complete by the third quarter and revealed a goodwill impairment charge of £852 million relating to the deal. The goodwill is connected to the group’s purchase of Argos in 1998 and had to be aligned in light of Sainsbury’s offer.

Home Retail said sales at Homebase, the DIY chain it offloaded for £340 million to Australia’s Wesfarmers fell 5.2% on a like-for-like basis. Removal of Argos concessions from Homebase stores over the next 18 months is expected to reduced Argos’ operating profits by about £10 million.

Overall group profit before tax dropped to £94.7 million from £132.1 million, slightly above analysts’ average forecast for £93 million.

Shares dipped 0.7p to 169.5p. Sainsbury’s fell – losing 3.4p to hit 284.9p – along with fellow supermarkets Tesco and Morrisons after the competition watchdog said it had asked a number of grocers to review promotions.

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April 27, 2016 |
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