25 October 2008
Argos is bracing itself for the worst Christmas in its 35-year history and yesterday warned that full-year earnings will be hit if shoppers continue to cut back on spending.
Slow sales: Argos is bracing for a not-so-merry Christmas
Full-year profits for parent company Home Retail Group are expected to come in at £327m, lower then expectations of around £350m and almost a quarter less than last year's £433m.
Terry Duddy, chief executive of HRG, revealed underlying sales have tumbled by as much as 9pc at Argos and sister- chain Homebase in the last seven weeks.
While this is no surprise for the struggling DIY group, analysts described it as a 'bit of a shocker' for Argos as it marks a sharp deterioration from the 3% fall reported in the six months to the end of August.
The festive season is crucial for the chain as it accounts for half of its annual sales of £4bn.
HRG is swallowing a £542m writedown on the value of Homebase.
The collapse of the housing market means the 347-store business is worth just £358m, down from the £900m Home Retail paid for it back in 2002.
The writedown plunged the group into a pre-tax loss of £437m in the first half.
Excluding this one-off cost, underlying profits were down 19% at £121m.
Duddy said the recent turmoil in the financial markets and fears of a recession had dented consumer confidence.
He said the next three months would be the ' toughest in Argos's 35-year history' and warned the next financial year may be worse.
He said: 'People have been saying, "Where is my discretionary income? What is happening to my savings and my pension?" Now they're saying, "What is going to happen to my job?"'
Customers could also be hit by higher prices next year as the business struggles to keep a lid on rising costs and the impact of a weaker pound - Home Retail buys around half of its products in China where exports are normally priced in dollars.
But Duddy insisted there was no reason to be gloomy: 'We are still a business that will make £327m this year.'
Argos is hiring 5,000 fewer temporary staff over Christmas and has doubled its 'value' range of basics to 150 lines.
It has also ensured stores have stocked less products compared to last year.
Homebase will open fewer stores next year and overall investment in the group has been cut to £175m from £225m.
The interim dividend was maintained at 4.7p and the company has £275m cash in the bank, suggesting the final dividend is safe.
Shoppers will spend more this Christmas than last, according to research by retail consultancy Verdict.
But the extra money will be eaten up by the higher cost of food. It predicts people will spend £82.3bn in the last three months of 2008, or £1,363 per head. While this is an increase of 2%, it is the second lowest growth rate in 20 years.