Home Retail cancels its payout, despite having net cash.
The past year has been a terrible time for high-street retailer Home Retail Group (LSE: HOME). However, the group's shareholders would have had a far better year, had it not been for multiple mistakes by management.
No place like Home Retail
Many struggling retailers have unveiled poor profits for 2011-12, but Home Retail's must be among the worst. Indeed, things are going so badly that the owner of Argos and Homebase has decided to cancel its juicy dividend payout.
This morning, Home Retail -- which describes itself as "the UK's leading home and general merchandise retailer" -- released pro-forma results for the 52 weeks to 25 February 2012.
The market reaction was swift and brutal: as I write, Home Retail's shares have dived 9.7p to 91.3p, crashing nearly 10% and reducing the retailer's market value by almost £80 million to below £745 million. What caused this vote of no-confidence from Mr Market?
Frankly, there was little positive to pick out from these latest results. Sales slipped 6% to below £5.5 billion, while Home Retail's cash gross margin dropped 7% to just over £2 billion.
When both sales and margins slump, this is a terrible 'double whammy' for retailers' profits. As a result, the group's benchmark profit before tax crashed a horrible 60% to £102 million from £254 million. Benchmark earnings per share followed suit, collapsing 59% to 8.7p from 21.3p.
Thanks to this plunge in profitability, Home Retail decided not to pay a final dividend, so its interim dividend of 4.7p becomes the full-year dividend. What's more, given Home Retail's ongoing troubles, I would warn shareholders not to hold their breath for the dividend to be reinstated any time soon.
Splashing shareholders' cash
Home Retail's only attraction today is that it is sitting on net cash of £194 million (as at 3 March). However, the group's cash pile would be so much greater had its board of directors not blown a big chunk of it.
Habitual Fool readers will know that I am not a big fan of share buybacks. All too often, companies that purchase their own shares destroy shareholder value, rather than enhancing it. If a business has spare cash floating around, then reinvest this into growth or return it to shareholders in the form of higher cash dividends or special dividends.
The board of Home Retail clearly disagree with me, as they decided to use £150 million of shareholders' cash to buy back the group's own shares. Alas, Home Retail's share price has been crushed over the past 12 months. On 4 May 2011, it closed at 217.2p, so it has plummeted by nearly three-fifths (58%) in one year.
In effect, Home Retail's board has turned £150 million of cash into shares worth as little as £63 million. D'oh!
Heads must roll
Terry Duddy, Home Retail's chief executive, offered this familiar excuse for poor performance: "Whilst the Group adopted a cautious trading approach during the year, spending in our markets declined further than our initial expectations, with many customers facing pressures on the amount of disposable income they had available for the purchase of discretionary items."
Looking ahead, Duddy added: "In a particularly difficult trading environment, we have managed our costs and cash effectively. While we remain cautious about the consumer outlook over the short term, we are well-positioned operationally and we will continue to prioritise investment in our leading multi-channel capabilities to shape the future of shopping for our customers."
Unfortunately, with Homebase plodding along and Argos losing more sales by the day, there's little hope of any short-term turnaround for Home Retail.
At today's price of 91.3p, the FTSE 250 firm trades on a forward price-earnings ratio above 15 and now offers no dividend. With sales, margins and earnings all expected to decline in 2012/13, this rating is clearly far too high.
Hence, until there is a sea change in Home Retail's operating performance, plus more changes to its management team, my view is simple: Cannot Recommend A Purchase!
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> Cliff does not own any of the shares mentioned in this article.