Argos has blamed the squeeze on living standards faced by low-income families for a devastating collapse in trade that almost wiped out its first-half profits. Profits at Argos crashed 94% to £3.4m in the first six months of its financial year, its worst performance since 1998. Like-for-like sales dropped 9.1% in the six months to 27 August, with sales of important products such as TVs down as much as 20%.

The grim figures wiped more than £160m off the market value of its owner, Home Retail, with the shares closing down 20.2p at 99.5p.  ”Core customers at Argos have continued to be under pressure,” said Terry Duddy, chief executive of Home Retail.

Duddy has argued that Argos customers, drawn from the mass market C2 and D socio-economic groups, continue to struggle because they have not benefited from falls in mortgage rates as much as those with higher incomes.

The squeeze on British households was starkly illustrated on Tuesday, when official data showed that inflation hit a three-year high in September, driven by soaring gas and electricity bills.

Duddy called on the chancellor, George Osborne, to use his autumn statement to increase the income tax allowance to £10,000 to give lower income households “more pounds in their pocket”.

Argos stablemate Homebase also suffers

Argos stablemate Homebase also suffered falling sales and profit margins, which meant group profits for the half were down 70% at £28.3m on sales of £2.6bn. Duddy said: “Market conditions remain weak and in these early weeks of the second half have not seen the improvement in sales that we had anticipated.” He predicted like-for-like sales would remain firmly in negative territory for the rest of the year and that Christmas, when the catalogue chain makes up to 80% of its profits, would be crucial.

Home Retail is yet to replace Argos’s long-serving managing director, Sara Weller, and following her departure in June Duddy led a strategic review to assess whether any of the retailer’s problems were self-inflicted. It concluded, however, that Argos’s multi-channel formula was the right one, as customers increasingly shopped online or using their mobile phone rather than just in person at one of its 754 stores. “We are gaining ground with our customers and not losing out to our competitors,” insisted Duddy.

Argos has launched a series of new ventures

To boost sales Argos has launched a series of new ventures including a home shopping channel, as well as tie-ups to sell books and childrenswear. Despite pulling the plug on an attempt to crack the Indian market, it announced plans to pump £22m into a joint venture with Chinese appliance maker Haier Electronics that will see an Argos branded website launch in the fast-growing retail market next year.

But after four years of declining profitability some analysts argued that Argos had deep-seated problems and needed a radical restructuring. They point to the growth of websites such as Amazon, and aggressive supermarkets, with Asda currently promising to be “cheaper than Argos” on toys – a key battleground at Christmas.

The weak figures saw Panmure Gordon analyst Philip Dorgan cut his profit forecast for the year by 25% to £96m. “Management has stated that it has kicked the tyres, looked under the bonnet, taken the engine to pieces, put it back together and decided that it doesn’t need to change strategy,” he said. “We take a more simple view. If it walks like a duck, quacks like a duck, then it’s a duck,” he said.

Argos Profits down 94%

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Like-for-like sales at Argos fell by 9.6% to £817m during the 13 weeks from 27 February to 28 May. Home Retail’s chief executive, Terry Duddy, said three-quarters of the decline was due to poor consumer electronics sales. Sales of TVs plummeted by 20% while video games were down 25%.

Duddy said the overall consumer electronics market had declined by 20% over the period, with Argos matching that wider decline. “We said at the beginning of the year we would plan with increased caution and these figures reinforce that,” said Duddy. “It’s a big-ticket and consumer-electronics issue.” He noted that the Asda income tracker had shown a “real step down in disposable incomes”. But asked whether the government should push ahead with its austerity measures, he said the market was “hard to read” and there was “not enough evidence” to change course.

He stressed that Argos managed to hold on to its market share, helped by good laptop sales. Argos sold 150,000 TVs in the quarter, compared with a total of 1.5m last year – accounting for one-in-five of all TVs sold in Britain.

Margins dropped by 75 basis points as prices continue to fall. “You’ve got to do promotions,” said Duddy. “There’s some very sharp pricing in TVs and video games.” A 32-inch flatscreen TV can now be bought for £200 while a 37-inch set can cost less than £300.

Seymour Pierce analyst Freddie George said: “Argos remains under pressure from a weak consumer environment while the food retailers continue to grab share in its core markets. The stock price, however, is underpinned by the dividend, which is unlikely to be reduced in the medium term.”

Duddy now expects a “mid single digit” decline in like-for-like sales at Argos this year, a touch down from the company’s previous forecast of a range between low and mid single-negative digits. The second quarter will be tough because of the comparison with last year’s World Cup while the comparatives should get easier into the autumn when sales were depressed by bad weather last year.

Matthew McEachran at Singer Capital said: “We would expect downgrades today of £10-20m (5-10%) to current year [pre-tax profit] estimates. We remain cautious on earnings prospects given cost pressures and the group’s exposure to the UK mass market customer.”

An Argos TV channel is due to launch in the next few weeks as the retailer, which lost its long-serving boss Sara Weller in April, attempts to reverse sliding sales. It is also expanding its book range and moving into children’s clothes.

The company’s Homebase chain, on the other hand, benefited from the warm spring weather and the extra bank holiday in April for the royal wedding. Buoyant sales of garden furniture, plants and exterior decorating products pushed like-for-like sales 1.6% higher to £458m.

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To get the tills ringing Tesco and Argos are offering half-price deals on toys like Buzz Lightyear dolls while fashion chains French Connection, Hobbs and LK Bennett have slashed the price of party frocks and high heels to get hard-up fashionistas to spend. “The snow in the week before last murdered a lot of us,” said the chief executive of one fashion group, who added that discounts were bigger than in previous years.

Last week’s milder temperatures brought some respite ahead of what is potentially the biggest sales week of the year for retailers with well over £1bn expected to be rung up at the tills every day. Department store chain John Lewis said it had set a new sales record last week as takings surged to £121m on the back of “pent-up demand”.

David Barford, director of selling operations, said customers pulled out all the stops to get their hands on iPads, coffee machines and handbags: “Even in areas where snow has persisted we saw the determination of our customers to deliver a perfect Christmas for their friends and family.”

John Lewis’s “never knowingly undersold” pledge meant the retailer had to match special offers available at rivals such as Debenhams and Dixons. Barford conceded that discounting “had undoubtedly played a part” in pulling in sales and he suspected it would be the group’s high water mark this year. But he could not rule out another sales bonanza this week.

The intense competition among retailers is also delivering festive cheer for hard-up parents as one of the major battle grounds is toys. Caution from shoppers as well as the intensity of rivals’ promotions has forced The Entertainer, which is the UK’s biggest independent toy chain, to bring forward its January sale and it is already offering 75% off some toys.

“We have already cut the prices of a lot of the stuff that we would normally put in the January sale,” said managing director Gary Grant, who complained that fewer shoppers had been visiting its stores. “Shoppers are being more cautious and there is very competitive pricing about.”

Argos is offering 50% off some toys while Tesco is offering “three for two” across its range, including favourites such as Lego, Barbie and Monopoly. “It all depends on the last few weeks but there is a possibility we could be down on last year,” added Grant.

The latest data from analysts at Synovate, which counts shopper numbers, highlights the tough conditions faced by retailers. Tim Denison, director of retail intelligence, said UK shopper numbers were down 4% on Saturday, compared with the same day last year.

The trend is more serious if the fortnight affected by the snow is examined with UK numbers down 14.3% year on year and 21.5% in Scotland. “Retailers are acutely aware of the lack of consumer confidence,” said Denison, who highlighted the trend for “spot” promotions online, which are posted on websites but designed to encourage store trips.

Howard Archer, chief economist at IHS Global Insight, said that a big concern for retailers is that more cold weather is forecast. “With Christmas falling on a Saturday, next weekend’s trading is going to be of major importance. The problem for retailers stems not just from the bad weather stopping people getting to the shops but in the disruption it causes to supply chains.

Supply chains have been massively hit by the snow and ice this month, with many products being stuck at container ports for an extended period. More bad weather would increase the likelihood that some people may end up buying less Christmas presents due to time constraints.”

Retailers are also devoting more firepower to Christmas this year as they are worried sales will dry up in the new year as the VAT rise kicks in and public sector cuts come to fruition. The combination is particularly deadly for retailers such as B&Q and Homebase selling big-ticket items such as bathrooms and kitchens.

B&Q is launching its “biggest and earliest” January sale on Friday – a week earlier than last year – as it tries to tempt customers into a last hurrah. With storm and weather clouds on the horizon, it would seem there is one shopper that retailers can rely on to splash out at Christmas.

A survey by mystery shopping company Retail Active has profiled “last- minute man”, a potentially high-spending group that has left buying a present for their partner until the very last minute. “Last Minute Man is a salesperson’s dream: he’s cash-rich and time-poor,” said Retail Active’s managing director, Julian Chamberlain.

“He does his desperate shopping in the final hours of Christmas Eve and he ends up buying expensive and unwanted gifts. We have been coaching staff on the jewellery counters of a major retail chain on how to spot him. They have to look for a man looking through a wide variety of stock, not knowing what to buy and wearing a blank expression.”

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A four-hour shift might not appeal to many of us, especially those who spend an hour travelling to work, but the spin is that it is good news for workers with complicated home lives such as carers or those with illnesses, or who simply want to earn more cash.

Tesco has been testing “slivers of time” for a year and will today launch what it more mundanely calls its “overtime booking system“, enabling staff to pick up extra hours before Christmas.

“A challenge for our business is responding to changing shopping patterns,” said Arnie Herrema, head of Tesco’s flexibility programme, who deals with the complex demands of juggling checkout queues, the shopfloor and internet orders.

“We wanted to simplify the processes that enable our staff to book overtime, whilst allowing for a more efficient way for managers to sign staff up for extra hours.”

With nearly 2,500 stores and 340,000 UK staff, Tesco has in effect created an internal labour market that lets shopworkers sign up for extra shifts in their own or other nearby stores. The system allows them to find periods of time when they are free to do extra work. The company said 10,000 employees had already signed up.

It is unclear what the ramifications of this new system will be on the government’s proposed happiness index. Many retailers – with the possible exception of employee-owned John Lewis, which has “happiness of partners” as a goal in its constitution – are more concerned with profitability.

At Tesco, the impetus to join in comes from workers rather than bosses. “Employees can set parameters for their minimum shift length and minimum period of notice,” said Herrema. Signing up for slivers-of-time working had no impact on their regular hours.

“We want to achieve the flexibility required in a way that also helps our 340,000 employees, many of them would like extra hours of work that will fit around their family commitments, studying or other activities,” he added.

Some are concerned that ultra-flexible working might suit employers more than employees. There is the possibility that the government could harness the idea for the unemployed.

The UK retail sector, which employs close to 3 million people – 11% of the country’s workforce – is a low-paid industry with many employees already working part-time or flexi-hours. The recession has had a devastating effect, with high-profile casualties such as Woolworths – which employed 30,000 – and it is estimated that 145,000 jobs have been lost in the last five years.

Many workers have suffered as employers such as Argos, Homebase and Halfords cut their hours to shore up profitability during the downturn. Whether slivers of time turns out to be a blessing or a curse for workers remains to be seen.

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Terry Duddy, the chief executive of Argos owner Home Retail Group, said its core mass-market customers, in the C2 and D socio-economic groups were “under greater pressure” as they had not benefited as much from big falls in mortgage rates as those with higher incomes. They had been “hammered by the recession and haven’t got out of it”, he said.

Group profits were down 23% at £95m for the six months to 28 August, with progress made by sister chain Homebase helping make up for a 32% decline at Argos, where operating profit was down £25.3m at £54.4m. Like-for-like sales were down 6.5% at Argos and 0.8% at Homebase.

The shares, which have lost more than a quarter of their value this year, closed down more than 2% at 214.7p. Argos, which is the UK’s biggest toy retailer, makes the bulk of its profits at Christmas. Duddy said it was planning cautiously for the crucial trading period but did not expect an immediate hit as a result of the government cuts announced yesterday.

 ”Customers always come out to shop for Christmas,” he said, adding that the impact “depended on when the cuts come through”. Duddy said Argos had held market share in most of its product categories but that games consoles and big-ticket home-related goods such as furniture “saw challenging conditions”.

TV sales were also lower than a year ago. By comparison, Homebase, which attracts a wealthier demographic than Argos, said seasonal ranges such as garden furniture and toys had sold well, while new services such as bathroom installation and fitted wardrobes had also been well received.

Analysts are concerned that Argos, which generates 90% of Home Retail’s profits, has bigger problems than those caused by the downturn. They fear it is losing the battle with the supermarkets, which are aggressively targeting non-food and internet sales.

Total sales at Argos were down 4% at £1.8bn, while Tesco’s non-food sales rose 2.5% to £4.4bn during the same period. Profits were also hit by rising shipping costs. Duddy argues that Argos is well placed to benefit from changes in shopper habits.

A third of its sales are booked online, with two-thirds of those orders collected by customers who have used its “check & reserve” service, while 1% of sales had been logged via its iPhone app, which was launched this summer. To counter falling sales, Home Retail has cut jobs at head office and reduced the hours of store staff, changes that helped save almost £40m during the half.

“We remain of the view that Argos is both cyclically and structurally challenged,” said Execution Noble analyst Caroline Gulliver, adding that the retailer would face its toughest quarterly sales comparisons for the Chirstmas period. Last month Home Retail lowered its profit guidance to the City, warning that it is expected to make £250-275m in the year to February compared with £293m last year.

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This morning John Lewis, reported a 11.1% rise in sales in the week to 2 October, with sales in its department stores, up 13.9%. Freddie George, an analyst at Seymour Pierce, said: “The company reported double-digit growth over the first six days, ended apparently, by the busiest Saturday of the autumn.

“We are becoming more and more confident about the outlook for the general retail sector, We believe the government will temper the announcement of the 20 October spending cuts by bringing them in over a number of years.”

At the start of this week Sir Terry Leahy, the chief executive of Tesco, said he did not expect the country to tip back into recession because the strength of the rebound in emerging markets like Asia would underpin the recovery elsewhere. “My starting point is the global economy, which is in a pretty robust recovery,” said Leahy.

Asked whether he thought Britain was headed back into recession, he added: “I don’t think it will. If you look at the customer psychology, and the pulling power of the developing markets, I think they will pull Europe and the United States into a stable and established recovery.”

Analysts said the size of Tesco’s retail empire, with stretches to almost 5,000 stores in 14 countries, gave it a unique insight into the health of the world economy.

Despite predicting tough trading conditions this year and next, Ian Cheshire, the boss of DIY company Kingfisher, which owns B&Q, has also ruled out the prospect of a double dip: “We see 2011 as being difficult because of the budget cuts, tax rises and the VAT rise. But, now that we have a clearer picture of what’s happening in the next 12 months, feel more positive about 2012.”

There are no rose-tinted spectacles in the boardroom of clothing and homewares, chain Next, where its chief executive, Lord Wolfson, the Tory peer, remains one of the most bearish commentators on the outlook for the economy. At its recent results he predicted a “new normal” of sluggish consumer growth for the foreseeable future: “We have a reputation as a bit of a Cassandra. The thing is, Cassandra was actually right. Over the last three to four years we have called it right.”

Terry Duddy, the boss of Home Retail, which owns Argos, agrees with Wolfson. Sales at the Argos chain, have slumped this year as worried consumers hold off making big ticket purchases like TVs and furniture. Duddy says its core customers, who are in the C2 and D socio-economic groups, have been “hammered by the recession and haven’t got out of it”.

Marc Bolland, the new chief executive of Marks & Spencer, closed the week on a more optimistic note with the UK’s biggest clothing retailer, reporting better-than-expected second-quarter sales. The Dutchman, who joined M&S in May, said he did not expect the government spending cuts to send the economy into reverse. “No, we don’t expect a double dip,” he said, adding: “Yes, we expect customers, to have a more difficult trading environment, but we expect to be well positioned.”

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A couple of years ago, Argos hired 20,000 temporary staff. Last year, the figure was 12,000 staff working 12 hours a week on average. This year, it will recruit 7,000 workers doing 5% fewer hours. Terry Duddy, chief executive of parent Home Retail Group, says Argos’s “core mass market” of consumers has been “hammered by recession and haven’t got out it”.

It is hard to point to a more downbeat assessment from a major retailing group in recent months. Argos has the mighty Tesco on its borders, which might contribute to Duddy’s mood, but he says the chain’s share of its market is firm.

What about the notion that shoppers will engage in a pre-Christmas spree to beat the VAT hike at new year? Duddy is not holding his breath. Big-ticket items is where the effect might be felt first but there is “no sign of a boom” in sales of kitchens at Homebase, Home Retail’s other chain.

One should never underestimate retailers’ ability to whip up excitement at Christmas but yesterday’s evidence from the sector suggests miracles will not happen for them this year. There are too many job losses around.

From investors’ point of view, almost the worst part is the way profit margins in the industry are slipping in parallel. That suggests that retailers, despite being given warning of austerity on the way, are already turning to promotional gimmicks. And that’s before the spending review spells out more bad news.

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The World Cup has failed to stoke demand for new TV sets with Argos today reporting slumping sales ahead of the tournament’s kick-off tomorrow. The build-up to the last World Cup in Germany saw stay-at-home fans splurge on flat-screen TVs, with sales double that of the previous year. Terry Duddy, chief executive of Home Retail Group, which owns Argos, said this time around it had been a damp squib: “There has been nothing like the same demand we saw ahead of the 2006 competition.”

Like-for-like sales at Argos plunged 8.1% in the 13 weeks to 29 May. Profit margins were also affected because it cut prices to win custom while juggling higher freight costs and a weak pound. Four years ago Duddy described an “unbelievable” market for consumer electronics as a sun-soaked World Cup coincided with the shift from “big box” cathode ray sets to sleek flat-panel digital TVs. “We had fantastic sales during that period – it was a perfect storm for us in terms of TV and barbecues,” he said.

The disappointing figures weighed heavily on the shares which were the second-biggest faller in the FTSE 100 after BP, closing down 4% at 228p. Analysts took out their red pens after the company, which also owns Homebase, said it hoped to match, rather than better, last year’s profits of £293m.

Argos said video games and console sales were particularly weak – down 30% in the absence of a new gadget to excite consumers. Lower gaming and TV sales accounted for roughly two-thirds of the overall decline. But Duddy admitted some of the pain was self-inflicted as it lost share in both areas during the period.

In April Home Retail Group announced £70m plans to modernise the catalogue chain, in the face of an onslaught from supermarket groups Asda and Tesco. Argos’s fortunes contrast with those of Middle England’s favourite store, John Lewis, which has reported a strong run in its technology aisles with weekly sales up 19% at last count. Argos is still the biggest seller of TVs in the UK and Duddy said the quarter was set against a very strong performance last year when rival DSG was fighting for survival.

Duddy said data on the UK TV market for the first four months of the year showed sales were below last year’s levels – when the country was still mired in recession – and the jury was out as to whether the World Cup would be enough to nudge it back into growth. Investec analyst David Jeary described the retailer’s performance as a “curate’s egg, good in parts, less so in others”.

Homebase fared better than its larger stablemate, with like-for-like sales down 1.4% as demand for garden furniture and barbecues mitigated a drop in sales of plants and gardening tools amid cool spring weather. Last week market leader B&Q said underlying sales fell 2.8% in the 13 weeks to 1 May.

Duddy said Homebase attracted more affluent consumers who had benefited from big falls in mortgage rates. On Argos he added: “Mass-market customers have been having a tougher time, and feeling the pinch a little more.”

To make up for the sales shortfall at Argos, the retailer has embarked on a cost-cutting programme designed to save £20m. Last year Home Retail cut the hours worked by Argos’s predominantly part-time staff to save money and is expected to use the tactic again. “We have got some catching up to do at Argos but Homebase is ahead of the game,” said Duddy.

Analysts are worried that plans to cut public sector jobs and lift VAT will pile the pressure on Argos’s low income shoppers. “Argos is particularly exposed to the mass market consumer,” said JP Morgan Cazenove’s Gillian Hilditch. Bikes and car parts chain Halfords has made record profits of £117m, up 27%, despite the recession and confirmed it is on the lookout for more acquisitions.

Halfords has been boosted by strong sales of bicycles and cycling accessories – up 15% on the previous year. The retailer now accounts for more than 35% of the UK bicycle market. Like-for-like sales of car maintenance products – 30% of Halfords’ total sales – climbed 8%, boosted by extra demand caused by the winter weather.

Halfords has recently expanded into car servicing and MOTs, buying the 224-site Nationwide Autocentres business for £72m. Chief executive David Wild said he was still on the lookout for other deals and was monitoring about a dozen possible targets.

Wild said he was also braced for a rise in VAT: “It is inevitable. We just want to know when and how much. We have already ordered extra printing ink so that we can print out all the new shelf-edge labels. We will have 10,000 prices to change in 450 stores.”

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The catalogue group said it had put contingency arrangements in place with rival operators to ensure its deliveries were not disrupted by the strikes.

The Guardian has also learned that a group of 30 online retailers, meeting at a trade fair at Earl’s Court in London, have agreed to switch to other postal operators because of the disruption at Royal Mail.

Photograph: Johnny Green/PA

Jonathan DeCarteret from Post-Switch, a consultant present at the meeting, said: “A large number of these companies feel that they can no longer trust Royal Mail to deliver to their customers. Deals are being struck left, right and centre with its rivals. We find that once a company leaves Royal Mail they never come back.”

Post-Switch estimates that one quarter of Royal Mail’s 100 biggest customers, including banks, utilities and charities, were now talking to rivals to switch business. “The vote yesterday is only speeding up this process,” DeCarteret added.

Post-Switch said last month it handled almost three times as many inquiries from firms wanting to find an alternative to Royal Mail than usual, after months of regional stoppages at branches.

In a further dent to Royal Mail’s fast- shrinking customer base, eBay also said it was talking to other companies to make sure deliveries ran smoothly in the run-up to Christmas.

Separately a survey of 250 businesses, by the British Chambers of Commerce, found three-quarters were now considering using another delivery service.

Yesterday the Guardian revealed that the online retailer Amazon, the Royal Mail’s second largest customer, had already discussed moving its £25m contract to deliver packets larger than 500g to the rival Home Delivery Network.

Amazon confirmed it was “working on contingency measures with other carriers” but disputed the characterization of its HDN deal as a cancellation of a long-term contract. Industry sources said it came several weeks before a regular break-clause in Amazon’s contract with Royal Mail, causing concern for the state-owned group and jubilation at HDN.

Yesterday Royal Mail and the Communication Workers Union (CWU), which organized the ballot, traded thinly veiled insults as industrial relations sunk to a new low. The CWU called the state-owned group’s management, led by the former Football Association head Adam Crozier, “arrogant”, and said the 3-1 vote in favor of industrial action represented a “damning verdict” on the way the postal service was run. Royal Mail hit back, condemning the strike as “reprehensible” and warning it would be “very damaging”.

Talks today between the union and Royal Mail could avert a strike. CWU leaders will meet Monday to discuss whether to issue notice of national action. A spokeswoman said: “The ball is in Royal Mail’s court.”

The union claims Royal Mail is pushing through plans to modernize the business too quickly and without consultation. The postal group is more inefficient than rivals, and mail still has to be sorted by hand before any post round. Royal Mail’s plans would alter the nature of the job, as well as hours, for many workers.

The CWU leader, Billy Hayes, accused the government and Royal Mail of refusing to negotiate with the workforce over modernization. The union’s deputy leader, Dave Ward, said: “We’ve seen cuts and increased workloads and now we need an agreed rollout of real modernization. Aligning the interests of customers, employees and the company as a whole is a prerequisite for the successful modernization of Royal Mail.”

Mark Higson, Royal Mail’s managing director, said the firm had had more than 70 meetings with CWU in recent months. He added that Royal Mail was not planning to introduce any more big elements of the modernization scheme this year.

Alternative methods

Robert Hammond, a post expert at Consumer Focus, warned a national strike in the run-up to Christmas “will lead to a miserable time for consumers and businesses alike”. But there are ways of mitigating the misery.

Consumers should not rely on postal deliveries when waiting for bills or paying them, but find an alternative method such as phone, online or at a bank or post office, Hammond advised. For businesses that need packages delivered urgently, eschewing “snail mail” for courier companies is another, more expensive option.

But for ordinary consumers planning on doing their Christmas shopping online, it is impossible to avoid the effects of strike action altogether. It is true that online retailers like Amazon and Argos are talking to other postal operators about delivering medium-sized packages like box sets. But often these packages end up at the “last mile” of Royal Mail’s network – its local sorting offices – which rely on its postmen to deliver it. The best advice for those sending Christmas cards is to post them early – really early.

Tim Webb

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