Argos Proves Loser in U.K. as Wal-Mart Gains With Amazon: Retail
Comment of the Day

January 10 2012

Commentary by Eoin Treacy

Argos Proves Loser in U.K. as Wal-Mart Gains With Amazon: Retail

This is article by Sarah Shannon for Bloomberg may be of interest to subscribers. Here is a section:
According to Legal & General's Black, Argos's “very large” liabilities on store leases are also a concern. The operating lease charge was 366 million pounds in the last year, according to a first-half statement in October.

Nomura's Walker said Duddy should consider scaling back the number of outlets to contain costs. “It's a big cost base; you should be looking to reduce that store portfolio over time,” he said. “Management still think each store is contributing and profitable,” which isn't a “cash positive” decision, he said.

Home Retail had net cash of 200.5 million pounds at the end of the first half ended Aug. 27, and isn't indebted like retailers such as HMV Group Plc.

Adding more branded items that shoppers recognize at Argos may help improve its fortunes, according to John Guy, an analyst at Royal Bank of Scotland Group Plc. The chain sells 1,500 own- brand items such as Chad Valley toys, Alba consumer electronics, Bush televisions, and Hygena and Schreiber furniture.

“Argos needs to shift the product mix; people don't buy electronics that are own-brand as much these days,” Guy said. “The emphasis continues to shift in favor of branded goods with more males than females making the final purchase decisions. Own-labels aren't selling as well as they used to.”

Eoin Treacy's view The USA's retail environment has favoured discount offerings as consumers traded down. Luxury retailers have also prospered, suggesting middle income earners have been squeezed most following the credit crisis. The UK appears to have followed a broadly similar pattern though this is more difficult to demonstrate with charts because a number of the UK's larger retailers are unlisted. Primark, Arcadia Group, House of Fraser, Selfridges and Boots are all privately held.

The FTSE-350 General Retailers Index has been largely rangebound since late 2009 and recently retested the lower boundary near 1500. While currently staging at least a short-term rally, it will need to sustain a move above 1600 to suggest more than a temporary return to demand dominance. Marks & Spencer yields 5.35% and has a similar chart pattern to the Index.

Kingfisher Plc (B&Q, Costorama) generates as much revenue in France as the UK. The share rebounded impressively from the 2008 lows but has spent much of the last 18 months ranging in the region of the 2007 peaks. A sustained move below 235p would be required to question current scope for some additional higher to lateral ranging.

Next a former European dividend aristocrat and yields 3.46%. The share broke upwards to new highs in September and a sustained move below 2500p would be required to begin to question medium-term uptrend consistency.

Debenhams is primarily focused on the UK and reinstituted its dividend last year. The share has been ranging with a downward bias since 2009 and a break in the progression of lower rally highs, currently near 70.5p would be required to suggest a return to medium-term demand dominance.

WH Smith yields 4.29% and was among the first shares to surmount its 2008 peak. It has been ranging mostly above 450p since 2010 and has held a progression of higher reaction lows for the last 18 months. A sustained move below 500p would now be required to check current scope for continued higher to lateral ranging.

Home Retail's (Argos, Homebase) dividend has remained static since 2008 and its estimated yield is 10.15%. I wonder how sustainable this is. Prices continue to trend lower and a sustained move above 125p would be required to break the progression of lower rally highs.

Halfords yields 7.6% but the sustainability of the pay-out is questionable. The share remains in a consistent downtrend and a sustained move above 350p would be required to begin to question medium-term supply dominance.

Back to top