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UK's Home Retail stays cautious despite better sales

HOME Retail Group Plc, Britain's biggest household goods retailer, said it remained cautious today despite posting better than expected first-quarter sales and market share gains at both its Argos and Homebase businesses.

The group said the first-quarter outcome reflected strong sales of outdoor products such as barbecues, cycles, camping and garden equipment, that were boosted by good weather in March and April, but was not indicative of the overall state of UK consumer confidence.

"I don't think at the moment we are strong proponents of the green shoots (of recovery) at this early stage of the year," Finance Director Richard Ashton told reporters on Thursday.

He said an expected further rise in UK unemployment did not augur well for consumer demand prospects.

Shares in Home Retail have increased in value by a third over the last three months, outperforming the DJ Stoxx European retail index by 16 percent.

The stock was down 1 pence at 265 pence at 0931 GMT, valuing the business at about 2.27 billion pounds (US$3.7 billion).

Like-for-like sales at Argos, the group's town centre catalogue-based retailer, fell 2.8 percent over the 13 weeks to May 30, while underlying sales at home improvements retailer Homebase were up 3.8 percent.

Gross margin was down by 0.75 percentage points at Argos and 2.5 percentage points at Homebase.

Analysts were expecting like-for-like sales to fall 4 percent at Argos and be to be flat at Homebase, with gross margin down 1 percentage point at Argos and down 1.5 percentage points at Homebase, according to a poll of eight analysts provided by the company.

The margin falls reflected above average sales growth in lower margin products, increased promotional activity and the increasing impact the strength of the dollar versus the pound is having on supplier prices.

"We ... expect the remainder of the year, particularly H2, to be more testing when currency-related headwinds and ongoing promotional (activity) become more prominent," said analysts at Credit Suisse in a research note.

Ashton said he now expected Homebase's gross margin over the year to end-Feb 2010 to fall 2.5 percentage points, having previously forecast a 2 percentage point fall. He still expects Argos's gross margin to fall 1.5 percentage points over the period.

He said he expected the consensus of analysts' underlying pretax profit forecasts for the year ending Feb. 2010 to rise to about 200 million pounds from 190 million pounds, with Homebase expected to make a loss of about 10 million pounds.

In the 2008/2009 year Home Retail made a profit of 328 million pounds.

Britain's retailers have been hit hard by the economic recession, particularly sellers of 'big ticket', discretionary items, although there have been some signs recently that the worst may be over.

Last week Kingfisher Plc posted a 3.2 percent rise in like-for-like sales at its B&Q home improvements business.

Some analysts think Homebase is losing market share to B&Q. However, Ashton, citing GfK data, said Homebase remained a market share winner.

"We don't know where we're gaining it from but we're gaining market share. Somebody in that shed market, and there are only four players, (Homebase, B&Q, Focus and Travis Perkins's Wickes) must be losing it," he said.


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