In normal circumstances, todays trading update from Home Retail Group (LSE: HOME) would probably have triggered a minor sell-off. The group said that full-year profits will be at the lower end of expectations and reported another drop in sales at Argos.
This isnt a normal situation, however. Home Retail is currently negotiating a possible offer for Homebase and is on the receiving end of takeover interest from J Sainsbury.
Does todays news do anything to change the outlook for Home Retail shareholders?
What the numbers say
Like-for-like sales at Argos fell by 2.2% during the 18 weeks from 30 August to 2 January. The groups gross profit margin also fell by 2.25% during the period. This suggests to me that despite price-cutting and promotional activity, Argos stores are struggling to maintain their share of the market, especially in consumer electronics and white goods.
There were some signs of hope. New Argos digital stores contributed 3.1% to sales, mainly from concessions thathave been opened in Homebase and Sainsburys stores over the last year. In total, Argos sales rose by 0.9%.
Internet sales growth also continued andonline salesnow represent 53% of all Argos sales, up from 49% last year.
At Homebase, like-for-like sales rose by 5% despite a 4% decline in total sales. This suggests that the groups programme of store closures is helping to weed out underperforming locations and leaving a stronger group.
The overall picture is disappointing, but I dont think it will be bad enough to discourage the takeover interest in the group. Given this, should investors buy, sell or hold the shares after the 52% gain seen so far this year?
On Wednesday night, Home Retail announced that its in advanced discussions with Australian retail group Wesfarmers over a potential 340m offer for Homebase.
This deal seems likely to go ahead. According to Home Retail, this would be likely to result in a 200m cash return to the groups shareholders. Thats 24.6p per share for Home Retail shareholders.
Home Retails share price hasnt moved this morning and stands at around 150p, suggesting that the market is valuing Argos and the groups financial services business at about 125p in the absence of a fresh offer from Sainsbury.
Will Sainsbury buy Argos?
Sainsbury is clearly keen on buying Home Retail Group. Chief executive Mike Coupe believes that Argos would help Sainsbury acquire more market share and improve its home delivery capabilities. Home Retails finance business would be an attractive addition to Sainsburys bank.
The big question for investors is how much Sainsbury will offer to pay for these assets.
According to recent press reports, an offer of between 160p and 200p seems likely. That would value Argos and Home Retails finance business at between 1.3bn and 1.6bn and would be likely to be paid in a mixture of cash and new Sainsbury shares.
With Home Retail shares currently trading at around 150p, some further gains are possible. But if the Sainsbury deal does fall through, Id expect Home Retail shares to fall back into the 100-120p range.
Theres still the potential for further profits. However, in my view, the balance between risk and reward suggests that it makes more sense to sell or hold Home Retail shares, than to buy them.
Its your choice.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.