Squeeze may see Supermarket sweep for Home Retail

The obituaries that will greet next year’s crop of high street failures could easily be written now: a further slowdown in consumer spending; January’s painful VAT increase; and specialist retailers’ breakfast, lunch and dinner being wolfed down by the supermarket chains.

Few people would suggest that Terry Duddy, the respected chief executive of Home Retail Group, belongs in that camp of the living dead. Nonetheless, all is not well at the owner of Argos and Homebase.

This week’s half-year results saw sales and profits tumble at Argos at the fastest rate since the recession began to bite nearly two years ago.

The poor performance is not unique to Home Retail. September brought a surprising drop in national retail sales and (notwithstanding the likely early-spending effect of the looming VAT rise) the likelihood of a significant pre-Christmas turnround appears remote given wider circumstances.

Yet Home Retail cannot pin all the blame on its economic milieu. Since announcing a £150m ($235m) share buy-back in April, the company’s shares have slipped almost 21 per cent, compared with a fall in the FTSE All-Share General Retailers index of just 0.7 per cent.

Argos in particular has struggled amid a lack of demand for big-ticket items from its lower-income customers. A revamp of the shops and accelerated emphasis on the internet are taking time to filter through – and with competition intensifying from the likes of Amazon and Tesco Direct, they may not deliver bottom-line growth at all.

So what can Mr Duddy do to stem the decline? Investors with one eye on the £330m of cash sitting on Home Retail’s balance sheet would hardly be pleased to see him use it for a significant acquisition given the challenges still facing the group.

A break-up also looks complex to achieve, while rumoured takeover interest from private equity groups, which felt real 18 months ago, now resembles wishful thinking on the part of deal-hungry bankers.

More realistic, perhaps, is the chance of a bid from one of the supermarket groups. Walmart, the owner of Asda, has looked in the past. Justin King, chief executive of J Sainsbury, has exhibited little of the dealmaker’s instinct since he took the job in 2004, but HRG would offer him a one-stop opportunity to turn Sainsbury into a general merchandising powerhouse.

Source : Mark Kleinman - FT.com