Home Retail profit up 40%, cautious on Christmas

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LONDON, Oct 24 (Reuters) - Britain's Home Retail Group Plc posted a forecast-beating 40 percent rise in first-half profit as strong flat-screen TV sales offset weakness at its do-it-yourself chain, lifting its shares 5 percent on Wednesday.

Britain's biggest household goods retailer warned of slower margin growth in its second half, however, as it cuts prices ahead of the key Christmas trading season to counter uncertain consumer sentiment.

Home Retail reported benchmark pretax profit of 149.8 million pounds (6 million) in the 26 weeks to Sept. 1, beating analysts' expectations of 142 million pounds, as like-for-like Argos sales grew 1.4 percent, compared with a 2.5 percent drop at Homebase do-it-yourself chain.

Chief Executive Terry Duddy told reporters he expected to see better performance in both areas, but that margins would see the effect of increased ''reinvestment in prices''.

Finance Director Richard Ashton said margins at catalogue-based Argos stores would be slightly lower following increased price cuts of around 5 percent from the normal range of 3 percent, while Homebase is likely to show slowed margin growth of around 200 basis points.

In the first half, Home Retail raised Argos margins by 125 percentage points and Homebase by 300 percentage points as it cut costs by sourcing products from cheaper overseas destinations and improved stock management.

Shares in Home Retail rose 4 percent to 402.5 pence by 0830 GMT on better-than-expected results. The company was spun out of the conglomerate GUS in October last year, when its shares started at 420 pence.

''This was a solid result, towards the top end of guidance.

However, there was little of substance in the outlook statement,'' Seymour Pierce analyst Andrew Wade said.

''With our bearish outlook for the sector, in particular our concerns over the level of discounting that may be required to stimulate demand over Christmas, Argos looks to be in a difficult space.'' British retailers expect a tough Christmas trading season as competition heats up, with top retailer Tesco launching an online and home shopping service, and debt-ridden shoppers reluctant to increase spending following five interest rate rises over a year and ongoing credit market turmoil.

Argos, which launched its biggest-ever catalogue in July and increased product lines by 9 percent to more than 18,000 items, saw a 50 percent jump in operating profit. Sales of flat-screen televisions, video games systems, mobile phones and navigation systems were strong.

Home Retail, which has about 10 percent of Britain's 58 billion pounds a year general merchandise and household goods market, has expaned with the launch of Argos in India and the acquisition of 27 Focus DIY stores for Homebase.

The group, which also bought a 33 percent interest in an Irish out-of-town homewares business, HomeStore&More, in April, said business was trading in line with its expectations.

REUTERS KR DS1425

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