Home Retail (HOME): Exceptional Returns (pt. 2)

Wednesday, Dec 05 2012 by

This feels like rather a neat post to write, given the last two 'topics' - last Wednesday on Morgan Sindall, and their 'huge' returns (mostly driven by working capital management and Friday pontificating on what returns on capital actually mean for an investment. So I swing over to the other end of the spectrum, to a company arguably at the bottom of its cycle and a rather popular share with value investors - Home Retail, who own Argos and Homebase.

I say 'bottom of its cycle' as a current and more forward looking thing, really, because one thing that did surprise me when looking at the company's accounts was how well it held up during the recession in general. Apart from a big asset writedown, as you can see on the graph, profits have actually held up rather nicely. It was only 2012 that saw that figure dip heavily, but forecasts are for a continuation of that - these very weak figures - instead of any return to their profit in, say, 2010. Which course of events is more likely?

I consider Home Retail more of a 'bigger picture' investment question. As far as I'm concerned, there's a sort of investment continuum between risk - there's companies whose primary risks are more idiosyncratic, and rooted entirely in how that specific business operates, and there's companies whose performance is determined more by market forces. Of course, no-one can escape market forces - but take something like Communisis and compare it to Home Retail and you'll see what I mean. The latter is a huge part of the general retailing market, and as such is primarily driven by general consumer confidence. This makes company specific trends more difficult to interpret. The first is facing a market of uncertain potential size, with a relatively new offering of services. 

 There's two primary questions I'm concerned with relating to Home Retail, and they're (as always) interrelated. The first is probably the most obvious - it's clear times are rough for the consumer, but how much of the downturn is cyclical and how much of the downturn is secular? I can't remember the last time I bought anything from Argos. I use other internet retailers (nearly always Amazon) for almost everything. On the other hand, when was the last time I bought…

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Home Retail Group Limited, formerly Home Retail Group plc, is a general merchandise retailer. The Company's segments include Argos and Financial Services. Argos is a multi-channel retailer, which sells products through approximately 845 stores, Website and mobile applications. Argos is supported by an in-house financial services offer, which provides a range of credit products for the Company's customers. Its Financial Services business offers a range of credit products. The Financial Services division offers Payment Protection Insurance (PPI) to customers for which a provision is recognized in respect of estimated future customer redress. The Company offers a range of over 57,000 products across home and general merchandise. Its portfolio of brands include Habitat, Heart of House, Bush, Alba and Chad Valley. more »

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1 Comment on this Article show/hide all

muddyrutter 22nd Jan '13 1 of 1

Interesting article, thank you. I think this is one of those situations when Jo public might have more insight than the fund managers etc. it is interesting that you never shop at Argos. My wife hates Argos and I used to buy high ticket items there and then odds and sods like good value cycling gloves. I now find myself using Ebay and Amazon for these items. As for Homebase we think it is the pits and avoid it like the plague. Poor service coupled with poor product choice being one of the reasons. Not exactly an objective approach to analysis but better than losing money. Regards. Nick.

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Private investor turned hedge fund analyst, looking predominantly at global small caps. Sector agnostic.


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