Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities. Click here to read more international insights.
Delete as applicable: Argos stores are irritating/surreal/essential. Home Retail Group (HRG), which owns Argos and DIY chain Homebase, is betting that consumer impatience will gradually push them towards option three. HRG certainly needs something to go its way. Full-year results, reported on Wednesday, showed that underlying profit fell a tenth last year. The group operating margin, meanwhile, is down from 5 per cent in 2009 to 1.7 per cent.
It unveiled a turnaround plan last autumn, the rationale of which goes like this. Busy consumers want to order online and pick up the product locally ASAP. Who wants to be hanging around for the mailman to turn up with the Amazon package? Argos can capitalize by using its 740-strong U.K. store estate to offer just such a service. Already, these sorts of orders are the fastest growing part of Argos's sales.
HRG will spend £200-million ($314-million) over the next three years to tweak its stores and will also increase the product range. A net cash balance of almost £400-million will help to pay for it, as will a cut in the dividend to 3 pence in 2013 from 4.7 pence in 2012.
The aim is to increase volumes. Argos revenue was £4-billion last year. HRG is aiming for £4.5-billion by 2018 with a mid-single-digit margin. That would imply an operating profit of £225-million at Argos, against £100-million last year. But to get there, the company will have to maintain a fine balance. It spends £350-million a year in rent. It could ease its way to the margin target by cutting store numbers when leases come up for renewal, as it is already doing. But that would make click-and-collect less convenient to some customers, and damage the chances of hitting the revenue target.
HRG has its backers. The shares have more than doubled since last June and now trade on 17 times forecast earnings. If new investors are to make a profit from here, they might need far more patience than Argos is hoping its shoppers display.