Home Retail's first half: What the analysts say

Argos’ multichannel initiatives are original, but it is increasingly under threat from Amazon’s continued push on to the high street, via the Collect+ partnership, alongside the grocers’ improving click and collect and digital capabilities. Meanwhile, the retailer also remains inhibited by its lack of flexibility in its store formats, with its collection only outlets lacking any aspirational feel. Therefore the major challenge for Argos will be to improve the strength of its brand, keep driving inspiration in product mix, and aim to be one step ahead of its competitors when it comes to multichannel. Homebase has delivered a positive set of results during this period, driven by the favourable summer weather, and the relative success of its ‘renewal plan’.  Its ranges of seasonal products, alongside its improved garden centres have been the key to its success, as have a slight increase in sales of big ticket items. Multichannel is also high on the agenda for Homebase, which grew multichannel sales by an impressive 28% across the period, and has worked to improve fulfilment through providing more flexibility in delivery times - Greg Bromley, Conlumino

Interim results were broadly in the mid-range of expectations. It will, in our view, be a challenge for Argos, in particular, to improve earnings markedly. The eBay trial is a positive but Argos still sells to the ‘low end of the market’, does not have particularly strong own label brands, which currently account for 16% of sales, and is now heavily reliant for growth on low margin commodity items in electricals (c.37% of sales). In addition, the company is up against relatively difficult comparatives, in particular with the tablet category, and will approach the anniversary of Comet going into administration. Homebase, although it had good figures, it looks structurally challenged and B&Q, which has lost market share over the last six months likely to retaliate, in our view.However, with confidence picking up in equity markets, there is a small chance of a bid from private equity, which would run the business for cash, in our view. Private equity would be attracted by the cash balance and the strong cashflow - Freddie George, Cantor Fitzgerald

Management indicate that the 5 recently refitted Homebase stores are performing in line with expectations and a further 10 are due to be completed before the end of February. Argos reported better than expected EBIT of £7.7m, a rise of 133% compared to a year ago. Costs appear to have been managed tightly. Progress with the transformation programme continues. The Home Retail investment case presents an interesting conundrum. In the short term Argos is likely to continue to benefit from PPI payouts, the demise of competitors and strength of underlying product markets (e.g. tablets) - and the operational gearing is significant. Self-help initiatives cannot be ignored. The trial with eBay also presents an opportunity. However, we remain cautious on the longer term outlook for the business believing that management’s targets feel a little too optimistic, already require c.£800m capex over five years including cash hungry refits at Homebase, and may yet need more radical surgery around the store portfolio - Mark Photiades, N+1 Singer

The market will be pleased by the stronger than expected recovery in first half profit before tax to £27.4m, driven by the strong summer trading at Homebase, although there is an ugly £12.6m exceptional charge to cover the restructuring costs at Argos. There is no current trading update at this stage, but it is interesting that Home Retail remain cautious about the economic outlook for the second half -  “we expect consumer spending will remain subdued, and whilst some macroeconomic indicators are improving, these have not yet led to an increase in household disposable income” - Nick Bub, independent analyst