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LONDON -- The shares of Home Retail (LSE: HOME.L ) jumped 6% to 111 pence in early London trade this morning after stating that its Argos subsidiary would close or relocate at least 75 stores over the next five years.
The announcement came within Home Retail's half-year results, which outlined how the FTSE 250 member would "reinvent" Argos as a "digital retail leader." Terry Duddy, chief executive of Home Retail, said: "The transformation plan aims to deliver growth by repositioning Argos as a digitally led business from a catalogue-led business, leading the market growth of digital commerce through online, mobile and tablet, and offering customers more products with the fastest, most convenient fulfillment options. This plan provides the right approach for Argos to achieve a long-term sustainable performance and profit recovery."
As well as store closures, Home Retail said a greater product range, fewer brands, and in-store, web-based catalogues would help support a turnaround. The five-year plan for Argos will incur capital expenditure of 300 million pounds and exceptional costs of 150 million pounds but aims to advance sales to 4.5 billion pounds and lift margins to mid-single digits.
Last year, Argos earned a 2.4% operating margin on sales of 4.5 billion pounds. This morning's half-year results showed turnover and profits at Argos stagnate at 1.7 billion pounds and 3 million pounds, respectively. The chain currently operates from more than 700 stores.
Including Home Retail's DIY chain, Homebase, the group's total half-year sales fell 1% to 2.5 billion pounds, while underlying profits slumped 29% to 18 million pounds. The interim dividend was slashed from 4.7 pence to 1 pence per share.
Were Home Retail's plans for Argos to come good, the division could produce profits of 225 million pounds and earnings of possibly 170 million pounds by 2018. That compares to Home Retail's current market cap of about 900 million pounds -- and may provide some upside to investors seeking a longer-term recovery possibility.
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