In April, Home Retail Group, the Argos owner, posted pre-tax profits of £115.4m – six years after crashing into the red. Finance director Richard Ashton explains how the group survived
The “laminated book of dreams” is how comedian Bill Bailey described the Argos catalogue. But while the doorstopper still contains fantasies for the 12 million who place it on their coffee tables, it’s also become a symbolic totem of a company that’s had to adapt to the digital age.
Last year, Argos’s parent company Home Retail Group (HRG) – which also owns Homebase – took the decision to cut catalogue circulation (along with the store’s equally loved bookie-like blue pens) in favour of in-store tablets. It’s part of a radical £300m, five-year fightback plan, after HRG suffered a tough recession, with underlying pre-tax profits shrinking to £91m in fiscal 2013 from £433m six years before.
The digital transition is working: in April, HRG announced its full-year results. Profits rose by 27 per cent, underlying pre-tax profit was £115.4m while sales at Argos stores (generating some 70 per cent of group revenue) were up 3.3 per cent.
It’s the best news to come from the UK’s biggest household-goods retailer since demerging from conglomerate GUS in 2006 – when only 16 per cent of sales came from the internet (today, it’s 44 per cent).
As finance director Richard Ashton told Director, HRG was buoyant after acquiring 27 stores from Focus DIY in 2007. “In the aftermath of the demerger, things went smoothly,” says Ashton. “Sales and profits increased, but that soon changed…”
By October 2008, HRG had plunged into the red, slumping to a first-half loss of £437m after writing down more than £500m from the value of Homebase. However, having weathered increased cost inflation and a worsening housing market, the retailer was in a good position to fight the downturn.
“We battened the hatches down. We planned ahead and pared back levels of capital expenditure which we’d been running at £150m to £200m a year. That year, capital expenditure fell below £100m. We still invested in the business but we were more cautious about where we invested.
“We also enacted a significant cost-reduction programme, so absolute costs fell by about £60m a year. It’s a bizarre scenario, but if you look at cash generation, the group’s best two years have been through the credit crisis.”
Still, Christmas 2008 trading was bleak, with sales at Argos and Homebase down 7.5 per cent and 10.2 per cent respectively – a stark contrast to previous festive seasons, driven by demand for flat-screen TVs and consoles. To counter this, HRG slashed the number of temporary seasonal staff at Argos from 20,000 to little more than 15,000.
With furniture and home improvement a key part of Argos’s business (about 20 per cent of total Argos sales) and the lifeblood of Homebase, the stagnant housing market didn’t help matters. Neither did the weak pound and subsequent cost inflation of 10 per cent on foreign-made goods (many HRG goods are made in China).
Argos cut 1,300 jobs in April 2009 and raised prices in that year’s catalogue. Then, in April 2010, HRG returned £150m to its shareholders, despite having posted an 11 per cent fall in full-year profits.
Over the next year, HRG bought back shares at an average of 233p apiece, using half its cash-pile in the process. By May 2012, the share price had fallen by two-thirds, with analysts at Liberum calling the decision “absurd”.
“Hindsight’s a lovely thing,” says Ashton, ruefully. “But we were sitting on over £400m of cash on the balance sheet, with investors saying, ‘Is there an opportunity to give it back to shareholders?’ We capped the buyback at £150m but the environment didn’t get better at the rate we anticipated.”
With the economy still fragile, HRG issued a profits warning in March 2011, with Argos like-for-like sales falling 5.6 per cent in the year to February.
“There is a raft of reasons [behind 2011’s profits warning]. Demand for TV/video games had slumped. The housing market was in decline. The consumer saving rate went up significantly more than the average level, with people protecting personal balance sheets…
“But for us, we were in a perfect storm. It meant we focused on cost control, maximising cash, paring back on investment and protecting ourselves for when things were better.”
The group purchased the then loss-making Habitat brand in June 2011 along with three London stores for £24.5m.
“HRG was opportunistic with retailers that had got into difficulty. We were cherry-picking assets – we didn’t want anybody’s infrastructure, logistics or head office – we wanted to buy brands that would drive volume to the existing infrastructure we had.
“After buying Habitat, every time we reformatted a Homebase store, we encompassed a Habitat concession. If you open the Argos catalogue, there’s a Habitat range. It was never about buying more stores – it was about buying an upmarket brand, which we could roll out across the stores.”
But the squeeze on households continued, illustrated by HRG posting grim figures that October, with Argos profits crashing 94 per cent to £3.4m in the first six months of its financial year. In February 2012, Argos appointed new managing director John Walden, an ex-Sears and Best Buy executive vice-president.
By the end of the year Argos had revealed plans to refocus as a “digital-led retailer”. The ‘Argos Transformation’, as Ashton calls it, was under way.
As part of the turnaround, circulation of the Argos catalogue was reduced, with HRG pledging to spend £100m a year for three years principally to upgrade IT systems to cope with digital devices.
Indeed, almost a fifth of Argos’s sales now come from mobile devices. With the click-and-collect service pioneered by Argos in 2000 now heralded as the high street’s saviour, HRG teamed up with eBay to take advantage of the internet shopping boom (customers can collect ordered eBay goods from 150 Argos stores). The chain has also scrapped some growth initiatives, such as its TV shopping channel.
In spring 2013, HRG announced its share price had doubled, while the group was aided by that summer’s heatwave – Homebase sales went up 9.3 per cent over the peak period, with customers buying garden furniture and barbecues.
“Homebase had an amazing summer in 2013. We don’t know months in advance whether it’ll be a good or bad summer. We just plan business on a normal weather pattern. If it looks better than normal, we can ease back on tactical promotions.
“If it looks bad, we lay on more tactical promotions because we need to drive footfall. Part of the challenge of trading Homebase is that weather can have a bigger impact than other retailers… Meanwhile, Argos is massively weighted to Christmas.”
With HRG chief executive Terry Duddy declaring a “digital Christmas” last year, Argos reported a 3.8 per cent sales increase over the festive period. “Record levels of sales via mobile and internet,” says Ashton.
With Walden replacing Duddy as HRG chief exec earlier this year, the turnaround is bearing fruit, with triumphant full-year results posted in April.
“The positive results are down to a combination of different factors. The economic environment has got better, product cycles have worked in our favour, sales of TV and tablets have been strong, we’ve had a strong summer for Homebase, plus there are the digital concepts in Argos and reformatting of Homebase stores. It’s good to finally have some economic backwinds rather than headwinds.”
Control of destiny
HRG profits were up 27 per cent, Argos profits increased by 12 per cent while Homebase profits had risen by 71 per cent. As Director went to press, HRG’s share price was 188p.
“We’ve traded through some difficult environments so I don’t feel remotely guilty that things are aligning in our favour,” adds Ashton. “We’ve also got over £300m of cash on our balance sheet which leaves us in control of our destiny.” However, he says this is just the start. “We’ve hit bottom and have started to come up.”