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GUS
GUS had a mixed Christmas with LFL sales growth weak at Argos (+1%), reasonable at Homebase (+4%) and remaining strong at Experian (+19%). The weak performance at Argos was a little disappointing but given that the sector as a whole did badly we would not yet give up hope that Argos can return to the strong sales growth it produced up to the first half of the year - during which sales were up 9.9% in the first half of the current financial year (once the effect of sales of businesses is stripped out), EPS was up 11% despite the sales of some businesses a and the 13% increase in dividends suggested that the management is confident about future growth.
Argos has manged to slightly improve operating margin despite price cuts which were should have kept gross margins broadly stable given the groups intention to pass on cost savings to customers. The Argos Extra shops, which carry a wider product range, are being rolled out out rapidly. This is a significant improvement to the format and appears successful, although given the weakness over Christmas it bears watching.
Homebase does not have the obvious growth drivers that Argos has but its recent performance has been better. Experian’s (credit reference and related services) North American business was held back by the strength of sterling against the dollar.
Argos also owns 66% of Burberry.
The weak LFLs at Argos add a little uncertainty (is the Argos Extra roll-out still boosting sales?) but rice cuts and the roll out of Argos Extra (shops carrying a wider range) should continue to drive growth. Experian is still growing strongly and should continue to benefit from market growth in the long term.
The 3.2% yield is reasonable but the prospective PE of 14× needs a return to LFL growth at Argos to justify this, we believe the format has prooven strengths and potential but the recent disappointment makes us a little cautious.
Price cuts and the roll out of Argos Extra (shops carrying a wider range) should continue to drive growth at Argos, (we are less certain about Homebase which is almost as large). Experian can, at the least, be expected to do well in the short term, and it the long term many of its markets are growing. Burberry’s growth is likely to be increasingly driven by Asia, but grow it should.
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