Argos-to-Homebase owner Home Retail (HOME) slumps 13.2% to 129.90p on Wednesday after posting a full-year profit warning ahead of the festive selling season.
Argos is the culprit, with CEO John Walden (pictured below) blaming weak trading, uncertainty ahead of 'Black Friday' and the costs of a new 'Fast Track' delivery service for the earnings shortfall.
Click here to scan through Home Retail's interims in detail. Though taxable profits grew 10% to a better-than-expected £34.1 million, Walden says 'performance overall was mixed'.
Homebase delivered 5.6% like-for-like sales growth and 23% operating profit improvement, yet Argos' sales and profits were impacted by declines in seasonal categories and electrical products such as tablet computers, televisions and white goods.
Following this patchy half, Walden cautions 'trading at Argos during this year's important Christmas season seems less predictable than usual, as both retailers and customers determine whether to repeat last year's unusual Black Friday patterns'.
Highly cautious ahead of the discounting frenzy that is Black Friday and with Christmas looming, Walden also flags increased investment in Fast Track and warns Home Retail's annual profit before tax will be 'slightly below' the bottom end of the £115 million-to-£140 million forecast range.
Over the first half, same-store sales fell 3.4% at Argos, the value-focused chain with razor-thin margins seeking to morph from a catalogue-led retailer into a digitally-focused business better-equipped to duke it out with the likes of Amazon (AMZN:NDQ).
With much fanfare, Argos recently launched a new 'Fast Track' service, becoming the first retailer to offer same-day store collection, and same-day home delivery, for almost 20,000 products across the UK. This headline-hogging proposition necessitates the hiring of extra staff, vehicles and van drivers.
Analyst reaction to today's earnings alert is scathing in some quarters. In a note entitled 'Home Retail - Are we seeing the next Comet etc?', Haitong Securities' seasoned retail scribe Tony Shiret questions: 'Why is Home Retail warning before it has started the key selling season? Despite being sellers this has somewhat exceeded even our bearish expectation.
'Clearly first-half figures speak to a degree to extra cost loading in Argos, but we would expect that management has some better visibility on likely pricing/promotional levels at Argos and does not like what it sees.'
Canaccord Genuity's David Jeary places his rating and price target under review, arguing 'the investment case on the shares hinges on a view of Argos, with Homebase in effect something of a sideshow'.
He adds: 'While we believe Argos's embracing of a digital future is the correct strategy, we have concerns on its ability to transform its financial performance. Not only was Argos a late arrival to the digital ball, despite being an early adopter of Reserve & Collect, but competition on the dance card is also intense, with some arguably better looking suitors competing for custom.'
Staying bullish is Cantor Fitzgerald Europe, with a 'buy' rating and 195p price target. Number cruncher Freddie George believes 'the underperformance in the stock has, in our view, gone far enough'.
He adds: 'The company has one of the strongest balance sheets in the General Retail sector with cash forecast at £292 million at February 2016, mail order debtors of £580 million and relatively high levels of provisioning. It also has a break-up value on our estimates of 266p per share, including 106p attributable to the cash balance and the debtors file.'
