High Street downturn catches up with Argos

During June, July and August like-for like sales went into reverse having been flat in the first quarter of the financial year. They fell by 5.8% in the quarter taking the fall for the half year to 3%.

Terry Duddy, chief executive of owner Home Retail, said this was in line with his expectations, but some analysts felt it was surprisingly sharp.

In contrast, the group's DIY and gardening chain Homebase actually saw a modest improvement in the rate at which its sales fell. In the first quarter they slumped by 12%, but in the second they were down by only 8.3%.

But Home Retail had a shock for investors saying that it will make a massive writedown on the value of Homebase which Duddy admitted would run to "hundreds of millions of pounds."

Gus, from which Home Retail demerged in 2006, bought Homebase for £900 million in 2002 and a large proportion of that price is likely to be written down.

However, Duddy said this will be an accounting exercise which would not affect profits nor, he said, change the company's banking arrangement.

"We are in the position of not only being cashflow-positive but also have nil debt," he added.

Looking ahead he remains unusually upbeat for a High Street retailer: "Going forward we see quite a difficult September and October. But we expect, just as we have seen in the last five years or so, that the consumer will again come out and shop at Christmas."

Argos makes two thirds of its profits in the second half of the year with the bulk of that based around Christmas.

Early indications from analysts were that they would trim back their estimates for the year which had already come down slightly since the last trading statement in June.

The average view on pre-tax profits ahead of today was that they could fall from last year's £433million to £362million.

Duddy said Argos had been hit by two things. The first was the continuing fall in demand for furniture and homewares as consumers continued to put off big-ticket spending.

There was also a decline in the rate of growth in consumer electronics almost entirely due to big swings in sales of video game consols.

In the first quarter, game players who had been frustrated by a lack of supply of the Nintendo DS and Wii over last Christmas were still out there buying up the games machines.

By the second quarter much of that demand had been satisfied and with the exception of the Wii Fit, there was plenty of supply around.

At Homebase the appalling summer weather hit sales of garden furniture and barbecues. On the other hand, sales of lawnmowers and other garden power tools were good as regular rainfall has kept the country's grass and hedges growing verdantly.

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Analysts pointed out that, with Argos supplying about 70% of Home Retail's revenues, the fall-off in that division was disproportionately bad news for the shares.

"With second quarter revenues so weak, we think the portents here are poor," said Landsbanki stockbrokers analyst Mark Photiades.

Numis Securities changed its share recommendation from hold to reduce as it said: "The bias to DIY, home goods and electrical leav e the group horribly exposed to the current market dynamic. Well run, wrong, wrong time."