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UPDATE 2-UK's Home Retail defiant as profits slump

Published 10/20/2010, 05:54 AM
Updated 10/20/2010, 05:56 AM

* H1 underlying pretax profit 95 million stg vs 123 mln stg

* H1 div maintained at 4.7 pence

* Has net cash of 327 million sterling

* Says does not expect trade to worsen

* Shares down 1.6 percent

(Adds detail, CEO, analyst comment, shares)

By James Davey

LONDON, Oct 20 (Reuters) - Home Retail, Britain's No.1 household goods retailer, insisted it was well placed to deliver long-term growth in shareholder value and did not expect trade to worsen after a first-half profit slump.

The group, which owns the Argos and Homebase chains, on Wednesday posted an expected 23 percent fall in first-half profit as cash-strapped low-income shoppers trimmed spending.

Chief Executive Terry Duddy argued the company's scale, strength in online and multi-channel retailing, cost-cutting credentials and strong balance sheet would allow it to ride out the impact of government spending cuts.

With the group heavily exposed to the mass market it could be vulnerable to any downturn in consumer sentiment.

"Although we're cautious in our outlook, we don't see things being terribly worse, but we'll see what happens later this afternoon," Duddy told reporters, refering to a spending review to be presented by chancellor (finance minister) George Osborne.

Duddy was adamant Argos is well-positioned despite analyst concerns over the structural challenges it faces.

"One of the things that I'm very clear about is that Argos is in a very good place as far as the future of shopping is concerned," he said, noting that over 30 percent of its sales are now over the Internet, with 1 percent already being generated by a recently introduced iPhone app.

STRUCTURAL CONCERNS

Shares in Home Retail, which last month lost its place in Britain's FTSE 100 index of leading companies, have lost a quarter of their value over the last year, underperforming a 2 percent rise in the general retailers index.

The stock was down 1.6 percent at 216.3 pence at 0852 GMT, valuing the business at 1.80 billion pounds ($2.8 billion).

"We ... believe that the longer-term structural concerns are reflected in the current share price," said analyst Freddie George at brokerage Seymour Pierce, who reckons the firm's strong cashflow and net cash of over 300 million pounds could make it attractive to a private equity buyer.

Home Retail made an underlying pretax profit of 95 million pounds in the six months to Aug. 28 -- in line with company guidance of a 20 to 25 percent fall on the 123 million made in the same period last year.

Total sales fell 3 percent to 2.72 billion pounds.

Sales at Argos stores open more than a year fell 6.5 percent, with gross margin down 150 basis points, while like-for-like sales at Homebase fell 0.8 percent, with gross margin falling 100 bp.

Home Retail has been particularly hard hit by a fall in consumer confidence because it sells discretionary goods to mostly lower-income shoppers, who have not benefited as much from big falls in mortgage rates as those with higher incomes.

Last month Home Retail lowered its guidance for underlying pretax profit to between 250 million pounds and 275 million in the year to the end of February 2011, from 293 million in the previous year.

"The actual outcome as always will depend on trading through the peak Christmas period which is where the bulk of the group's profits are made," said Duddy.

Home Retail maintained its interim dividend at 4.7 pence. (Editing by Mark Potter and David Holmes) ($1=.6360 Pound)

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