Argos parent issues profit warning

Home Retail, Britain's biggest household goods retailer, today warned on full-year profit and gave a grim forecast for the years ahead, stoking fears of a major downturn in consumer spending.

Shares in the owner of Argos and Homebase fell 7.6 per cent today after it said trading in January and February had proved more difficult and volatile than expected.

British consumers have been increasingly unwilling to spend as muted earnings growth and higher inflation, fuelled by January's rise in VAT and hikes in oil and food prices, bite into real incomes.

They are also worried about job losses and welfare reductions related to government spending cuts, as well as the prospect of higher interest rates.

On Tuesday, a survey showed British retail sales in February fell at their fastest annual pace in 10 months. Yesterday John Lewis, Britain's biggest department store operator and owner of the Waitrose supermarket chain, said it expected a return to slow growth in consumer spending after Easter.

Home Retail chief executive Terry Duddy suggested that was too bullish. "Where John Lewis, I think, have some optimism, I do not think it is really backed by any event that would dictate that happening," he told reporters.

"What we are learning at the moment is that even some of the promotional activity is not prompting a positive response that we had seen previously."

Mr Duddy said he was being "stark and realistic" in forecasting low-to-mid single digit like-for-like sales declines at Argos in 2011-12, with Homebase broadly flat, and a marginal reduction in Argos's gross margin and a marginal improvement at Homebase.

Shares in Home Retail were down 16 pence to 194.9 pence at 10.07am today, valuing the business at £1.57 billion.

Prior to today's update the stock, which last September lost its place in Britain's FTSE 100 index of leading companies, had lost nearly a quarter of its value over the past year, as cash-strapped low-income shoppers cut back.

Home Retail said it now expected pretax profit for the year to February 26th to be between £250 million and £255 million, down from £293 million in 2009-10.

In January the firm had forecast a year profit of about £263 million.

It said sales at Argos stores open over a year fell 4.6 per cent in the eight weeks to February 26th.

That was worse than a forecast for a 1.3 per cent fall, according to a company poll, and compared with a fall of 4.9 per cent in the 18 weeks to January 1st.

The eight-week outcome was flattered by a snow impacted comparative period in 2010.

Like-for-like sales at Homebase rose 3.8 per cent, better than an expected rise of 0.3 per cent and a fall of 1.2 per cent in the earlier period.

Argos's gross margin fell 150 basis points, while Homebase's was up 300 basis points.

Reuters