Tuesday, June 19, 2012

Home Retail IMS

Good morning! The most important announcement for me this morning is the IMS from Home Retail Group (HOME) - the retail group which owns Argos and Homebase.


It's been a poor performer in recent years, but I'm going to be bold here and call the bottom! Instead of the usual heavily negative sales, they have this morning announced that Argos at least has bottomed out, with Like-For-Like ("LFL") sales roughly flat at -0.2%, and Gross Margin also slightly down at 25 basis points (i.e. 0.25%).

Whilst that may sound uninspiring to the non-shareholder, to HOME shareholders this is a stellar performance, since we are used to being served up -8% declines in sales routinely!

I have always believed in the Argos format, as they not only capture passing trade in town centres, on the last man standing basis for general retail, but also now achieve 41% of their sales via the internet, which increased by 17%! So it's arguably the cheapest and largest internet retailer out there! It's far superior to buying on Ebay, as you are guaranteed product quality, refunds, etc, but also you reserve online, then pop into town to collect. I use their reserve & collect service a lot, it's great for smaller items as you have the item within maybe an hour of ordering it online. Not convenient for everyone, but for people who live fairly close to town centres, it's ideal.

The IMS makes this comment about current year forecasts, which is the key sentence in the report, and should put a rocket under the shares today, in my opinion;

"At this early stage of the financial year we are comfortable with current market expectations for full year benchmark profit."

Turning to their other business, Homebase, the picture is not so rosey (geddit?!).

LFL sales are down 8.3%, but gross margins are up a useful 225 bps, which will considerably offset some of that sales fall. However, they blame this on highly unseasonal weather, which in the case of a garden centre, I feel is justifiable, as it has been bizarrely odd weather this year.

Current broker consensus (per Morningstar) is for 6.3p EPS, so that puts the shares on a fwd PER of 12.7 at this morning's higher open of 80p. Not cheap, you might think? But check out the Balance Sheet! They had £300m average net cash last year (per the results narrative, which is close to half the mkt cap), plus they own a debtor book (instalments from customers) of around £500m, which is a securitisation deal just waiting to happen.

This stock appears very cheap to me, now trading has bottomed out.

Please DYOR as usual! I have a long position in this stock (and have just bought more at 81p this morning).

Regards, Paul.

P.S. Forgot to mention - despite the dividend being slashed last year, consensus forecast is for a 4.4p divi, so even after this morning's big rise, we're still looking at a yield of over 5%. Plus bear in mind that this is probably the low point in the cycle for their earnings, so future growth is not priced-in at all.

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