Editor's Comment

Operating costs up for Argos as sales and profits slip

Argos saw operating and distribution costs increase by £14m during the first half of its FY16, coupled with falls in sales and profits for the period.

Declines in electrical and seasonal products are being blamed for a negatively impacting sales and profits at Argos in the first half of its financial year, according to owners Home Retail Group (HRG).

The rise in operating costs underlines the investment Argos is making in its distribution network, with the launch earlier this month of Fast Track across the whole of the UK. Widespread take up of Fast Track is not guaranteed and it could become a costly failed venture if Argos’ customers don’t adopt it widely.

In a statement issued this morning, HRG said: “Argos is investing significantly in the launch of Fast Track and although the rate of customer take-up cannot be certain, we are confident that customers will increasingly embrace this market leading service over time.”

Highlights of Argos’ FY16 results:

  • Sales down 2% to £2.6bn
  • Cash gross margin down 1% to £973m
  • Argos operating and distribution costs increased by £14m (Homebase costs decreased by £26m)
  • Benchmark profit before tax for Argos decreased by £5.6m (Homebase increased by £6.5m, HRG as a whole increased by £3.2m or 10% to £34.1m)

John Walden, Chief Executive of Home Retail Group, said: “We look forward to an improved sales performance for both Argos and the Group in the second half. However, as I have previously stated, trading at Argos during this year’s important Christmas season seems less predictable than usual, as both retailers and customers determine whether to repeat last year’s unusual Black Friday patterns. The combination of this trading uncertainty, an increased level of investment in the launch of Fast Track and the underlying profit reduction from Argos’ challenging first half, mean that at this stage of the financial year we expect the Group’s full-year benchmark profit before tax to be slightly below the bottom end of the current range of market expectations of £115m to £140m.”

The eDelivery View:

Argos is in a state of flux; its hub-and-spoke strategy, the development of Fast Track, and the attendant investments of time, money and resources are long-term plays.

Dips in short-term performance are to be expected.

The only real note of concern or caution to be found here is the admission that no one really knows the extent to which Fast Track will take off among the Argos customer base. Speaking at the eDelivery Conference (EDC) last week, Andy Brown – central operations director of Argos Stores – said that Fast Track was appealing to new customers, people who were not regular Argos shoppers.

If he’s right, the hope must surely be in converting these new-comers, drawn to Argos by the speed with which orders are fulfilled, into loyal customers who shop there more regularly.

Hope alone is not a great basis for a business strategy though. The viability of a service such as Fast Track depends on mass penetration; you can only make a £3.95 delivery charge financially viable if you are operating at scale.

But Argos has many things in its favour. Its store network is the envy of many retailers, plus it has always been a bit of an oddity in terms of the shopping experience, and now that is becoming a significant advantage. It’s a shop with no shelves, and no stock for customers to pick up and examine. This means Argos has a clearer view, and a tighter control of stock levels and locations. All points an ebullient Brown made while speaking at EDC.

You can’t hope to operate a service like Fast Track without that sort of insight and control.

With Black Friday and Christmas approaching fast, we’ll soon get to see whose delivery networks and supply chains can cope under extreme pressure. While it’s likely to be a tough time for many, Argos could find itself well placed to ride the bumpiest waves this peak period.