Time to make a judgement call

Two of the retailers most mauled by the bears update next week, electricals group Dixons and Argos owner Home Retail.

Each is only reporting on a quarter and the likelihood is that trading conditions will not have got any better for either than has been the case all year.

The expectation must be too that both groups will trot out the arguments they have consistently made throughout the period of punishing trading conditions – both will claim to be outperforming competitors in various ways and reiterate their long-term confidence.

But, increasingly, investors face a judgement about whether the pair will exist long term. Each has lost about 40% of its value over the last three months and they are among the worst share price performers in general retail.

Both have been helped at times by vague bid speculation. There have been suggestions of a tie-up between Dixons and Carphone, and chatter for years that Asda might make a move on Home Retail.

In the absence of any firm indications that deals could be on the cards however, investors have to decide whether they buy the long-term fundamental stories.

Arguments can be made in support of both retailers. Despite its difficulties, Dixons pretty much owns big-box electricals retailing in the UK and its improvements to stores and service, while costly, have saved it from the fate of loss-making rival Comet.

But it is certainly under financial pressure and there are concerns about bond repayments due next year so, until trading improves, it is likely to remain on sell lists.

Investors must decide whether it is an undervalued recovery play or running up a down-escalator.

Similarly, few would doubt Home Retail has suffered as a result of its customer demographic. That said, there is a feeling flagship business Argos is, unlike Dixons, not at the top of its Game during these tough times.

In its case the catalyst for a change in sentiment may be the appointment of a new Argos managing director who can up the ante again on multichannel operations.