Home Retail Group Jumps 14% as Argos Beats Expectations

LONDON -- The shares of Home Retail (LSE: HOME  ) jumped 17p, or 14%, to 138p during early London trade this morning after the company said its full-year profits would be higher than expected.

Home Retail, which owns the Argos and Homebase retail chains, said profits before tax would be about 10 million pounds ahead of the current 73 million pound City consensus forecast. The FTSE 250 member also revealed its year-end cash balance would be in excess of 300 million pounds.

The upbeat performance was due to "good operational management and cash generation" during Christmas.

Argos reported total revenues up 1.6% to 1,744 million pounds for the 18 weeks to Jan. 5, with like-for-like sales up 2.7%. Progress was supported by strong demand for tablets, white goods, and toys, which offset weaker jewelry sales.

Meanwhile, turnover at Homebase fell almost 5% to 453 million pounds, with like-for-like sales down 4%.

Gross margins at both chains fell by 50 basis points during the 18-week period.

Terry Duddy, Home Retail's chief executive, said: "Argos had a good peak trading period building on its first-half performance... While we anticipate consumer confidence will remain subdued in the coming year, we are focussed on delivering the transformation plan to reinvent Argos as a digital retail leader and the ongoing development of the Homebase proposition."

Going on today's uplifted guidance, earnings may now be running at between 7 pence and 8 pence per share, which puts the shares on a potential P/E of about 18 or 19.

The present rating does not look like a bargain, although Home Retail's five-year transformation plan for Argos may encourage longer-term recovery investors.

Announced last year, Home Retail reckons Argos could earn a mid-single-digit margin on sales of 4.5 billion pounds during the next five years.

Potential operating profits could therefore be 225 million pounds and provide possible earnings of 170 million pounds by 2018, which compares quite well to Home Retail's current market cap of about 1.1 billion pounds.

Home Retail's recovery has seen its shares rally from a 69 pence low last year, thereby making the share a nice double for investors smart enough to spot the handsome buying opportunity.

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