Argos reports 15% rise in benchmark profit

In October 2012 Argos outlined a Transformation Plan to reinvent itself as a digital retail leader; transforming from a catalogue-led business to a digitally-led business. The Plan is designed to address competitive challenges, exploit emerging market opportunities and restore sustainable growth.

There are four key elements to the Transformation Plan:

1. Reposition Argos’ channels for a digital future;
2. Provide more product choice, available to customers faster;
3. Develop a customer offer that has universal appeal; and
4. Operate a leaner and more flexible cost base.

Operational review

Highlights follow. Please click here for the full report.

Reposition Argos’ channels for a digital future:
Argos has made significant progress in developing its digital offer in order to take advantage of a permanent shift in market trends. During FY15 it has introduced features such as a new website search engine, additional checkout functionality including stored payment cards, and an improved visibility of delivery slot options. Visits to Argos’ digital channels have increased by 23% to over 900 million in FY15 and sales via the internet continued to grow such that they now represent 46% of total Argos sales. Within this, sales from mobile and tablet devices grew by 38% to account for 25% of total Argos sales. It is anticipated that these channels will continue to grow and the improvements made will position Argos to enhance further its competitive advantage in this market.

Convenient local product collection supported by good customer service are of increasing value to customers, and Argos’ store estate therefore remains a key point of competitive advantage. Argos made progress during FY15 with its three digital store formats. It converted a further 27 existing stores to a digital format, taking the total number of digital conversions to 33. These stores average c.15,000 square feet.

20 digital concessions within Homebase stores were opened, offering a convenient fulfilment proposition to customers of these stores. These concessions operate from a footprint of c.1,000 square feet. Seven new small format stores were opened, including a store within the Cannon Street tube station, which is designed to allow commuters to reserve their products during the day for same-day collection on their way home. These small format stores operate on a footprint of c.1,000-3,000 square feet.

During FY16 a further c.80 Argos digital concessions within Homebase are planned, together with the recently announced addition of 10 digital concessions within Sainsbury’s stores, which will allow Argos to access an even wider customer base. In addition, Argos expects to convert at least 50 existing stores to digital formats.

Provide more product choice, available to customers faster:
Fulfilment remains highly competitive amongst leading retailers. Argos is uniquely positioned, through its store estate and supply chain, to provide market leading fulfilment options to customers on a national scale.

The ‘hub & spoke’ distribution model was rolled-out across the estate during FY15. This model allows c.20,000 products to be available in all Argos stores for same day collection, enabling stores of any size and stock holding capacity to offer customers the same compelling product range. Access to a wider range of products has resulted in sales in ‘spoke’ stores outperforming the estate overall. However, as ‘spoke’ store demand increased, there was an adverse impact on ‘hub’ store product availability and thereby sales. During FY16 Argos will refine its stockholding policy and analytics in order to optimise working capital and maximise the sales potential of this new model.

Argos also trialled an express next day home delivery proposition for larger, two man items during FY15 with encouraging results. Further development of the system capability to extend this offer beyond the trial will be completed in FY16. In addition, a trial of a ‘hub to home’ distribution model commenced during FY15, utilising the ‘hub & spoke’ fulfilment infrastructure to offer home delivery on a same day or next day basis. Argos expects to complete systems and operational development in FY16 enabling it to begin a national rollout.

Argos believes that other retailers could benefit from its unique, cost advantaged, national distribution and store network for ‘click & collect’ fulfilment. During FY15 Argos announced the extension of its agreement with eBay, which allows their merchants the option to offer product collection via an Argos store. During the year the service was extended to over 160,000 eBay sellers, and provided collection of over one million parcels, generating substantial additional footfall into Argos stores. Argos believes that it will be able to generate additional sales over the long-term through the additional footfall that this partnership creates.

Develop a customer offer that has universal appeal:
Historically Argos’ customer offer, meaning its products, pricing, marketing communications and customer experiences, has been biased towards less affluent customers. Argos believes that by providing an offer that is more appealing across the range of its customers, it has significant opportunity to grow its business.

A key component of creating a universally appealing offer is brand positioning and communications. During FY15 Argos launched its new brand campaign ‘Get Set, Go Argos’ across its customer media including traditional advertising, digital channels, catalogue and instore marketing. This new campaign has thus far received a positive response with the measure of a consumer’s likelihood to shop at Argos increasing to its highest level in three years. Customers’ attitudes towards products, breadth of range and quality have all improved as a result.

Product strategies remain an important element of the Argos Transformation Plan and during FY15 a further net c.11,000 products were added to the range. In addition, Argos has continued to make good progress in its plans to fill gaps in its product ranges, and a further 29 aspirational brands such as KitchenAid kitchen appliances, Bose sound systems and Royal Worcester kitchenware were added during FY15. During FY15 Argos also launched the Heart of House brand and re-launched Chad Valley as part of its ambition to create a number of more impactful own-brands. Heart of House now offers over 1,600 traditional and contemporary furniture and homewares products.

Financial Review

Total sales in the 52 weeks to 28 February 2015 increased by 1.1% to £4,096m. Net space increased sales by 0.5% with the store estate increasing by 21 stores to 755. Like-for-like sales increased by 0.6%. Electrical products continued to deliver sales growth driven by strong growth in VGS, TVs and mobiles, partially offset by market-driven declines in sales of tablets. This growth in electrical products, together with strong sales of seasonal products during the first half of the year, more than offset small sales declines in furniture, homewares and jewellery.

Benchmark operating profit increased by £17m, or 15% to £129.2m (FY14: £112.3m).

Source : Home Retail Group
www.homeretailgroup.com