Market Report: Argos owner hit as FTSE 100 falls 1.9 per cent

Home Retail Group came under pressure last night as traders moved out amid worries that the market might be underestimating the threats to its Argos chain.

Credit Suisse argued that Argos might be vulnerable in the medium term as supermarkets increased their non-food ranges. The broker said that compared to Tesco, for instance, Argos had lagged behind in terms of pricing throughout the autumn and winter, despite some discounting in November.

Moreover, the discounts are likely to adversely affect Argos's margins, with Credit Suisse expecting the chain's gross margins for the second half to be down 380 basis points, against 280 basis points previously.

"Our price comparison against Tesco suggests that Argos started [the autumn-winter period] with a significant pricing disadvantage, but that even following a very promotional period through November by Argos, where the level of pricing reduction peaked at nearly 9 per cent, we have found that Tesco has still remained cheaper on a larger number of lines," Credit Suisse said.

"In fact, from our most recent pricing data, Tesco was cheaper by more than 2 per cent on 28 per cent of lines versus 19 per cent for Argos. We also believe the significant discounting throughout November is likely to have impacted gross margins and offset any material sales gains made over the period."

The assessment was supplemented by some weak retail sales data, and left Home Retail 4.2 per cent, or 12.3p, weaker 283.7p. The wider retail sector also fell back, with Kingfisher falling 6.6p to 226.5p, Debenhams losing 2.35p to close at 81.75p and DSG International easing back 0.18p to 35.25p after the Office for National Statistics said that retails sales volumes fell by 0.3 per cent between October and November, confounding expectations of a 0.4 per cent increase.

Overall, the FTSE 100 veered south, with weakness in the retail, resources and banking sectors depressing it by almost 2 per cent, or 102.65, points to 5,217.61. The FTSE 250 was similarly unsettled, shedding 83.95 points to close at 9,057.4.

Banks were hit by worries about Citigroup, whose share issue drew a lower than expected price, and about the Basel Committee's new regulatory proposals for international banking supervision. Sentiment was dampened by fears that revised rules on capital might necessitate another round of fund-raisings.

Credit Suisse said it believed the reforms were "negative for the European banks sector". As a result, Lloyds Banking Group fell 4.48p to 51.1p, Barclays was down 18.15p at 273.85p and Royal Bank of Scotland, closed 1.11p lower at 30.74p.

In the mining sector, the US dollar strengthened after what was seen as a relatively upbeat overnight statement from the Federal Reserve. The greenback's gains pressured metals prices, however, which in turn bore down on mining equities.

Xstrata was among the hardest hit, falling by 57p to 1030p, while Antofagasta slipped 38.5p to 905p and Lonmin lost 63p to close at 1797p. Anglo American was down 73p at 2594p, Kazakhmys closed 47p lower at 1245p and Rio Tinto dropped 53p to at 3134p.

There was little activity on the upside, with only a handful of stocks managing to register gains. These included Invensys, up 2.1p at 283.4p, and G4S up 1.8p at 259.6p. Cadbury was also firm, rising by 3.5p to 792p as traders moved their money out of riskier plays, with some still pegging their hopes on a bid battle for the British confectioner in the new year.

Elsewhere, the data centre specialist Telecity, rallied by 22.8p to 384.6p after Citigroup reiterated its "buy" stance and increased its target price for the stock to 438p.

"The nature of the company's business model means there is significant capital investment upfront (about £60m per data centre) and a large element of fixed costs," the broker said. "As capacity has filled, its earnings margin has increased from 15 per cent in 2007 to 36 per cent in the first half of 2009, and we forecast further improvement to 43 per cent by 2012."

Over in the housing sector, Persimmon enjoyed another session of gains thanks to UBS, which switched its stance on the stock to "buy". The broker said the recent pullback in housing stocks had created a buying opportunity, adding: "With positive newsflow expected in January 2010, we see the current level as a good entry point. The sector has outperformed in 19 out of the last 21 years in the first quarter." Persimmon closed up 11.3p at 440p.

Further afield, Morgan Stanley supported sentiment around Genus, the cattle genetics company, which was 7p stronger at 642p after the broker adopted an "overweight" stance.

"The recent sell-off already discounts the challenging near-term outlook and the current price offers an attractive entry point for long term investors," Morgan Stanley said.

"Genus is set to benefit from population growth and rising food demand; industrialised farming methods and sector consolidation; and emerging market growth coupled with a shift to Western diets [which include more dairy and meat consumption]."