Should Argos crash worry eBay?

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Home Retail Group, owners of Argos, have seen their shares crash in value by almost a third in the past fortnight. If the wheels are coming off the group that could be a big concern for eBay who have closely allied themselves with Argos for eBay’s next generation of delivery services.

The shaky reaction by investors came when Argos issued a profit warning citing Christmas 2015 “seems less predictable than usual” with uncertainty around Black Friday, an increased level of investment and a challenging first half of the year.

Argos Share PriceIt’s worth remembering that Argos are in the middle of a multiyear transformation plan including Fast Track Collection and Fast Track Delivery, digital concessions and growing Internet and mobile sales.

Tony Shiret, an analyst at Haitong Securities touched a nerve when he compared Argos to Comet, MFI and Woolworths, all of who disappeared from the UK’s high streets.

Tony pointed out that in the last downturn when Argos shares crashed to a low of 69.85, Argos had EBIT (Earnings Before Interest and Tax) of around 8.5% compared with today’s 2½-3%.

John Walden, Argos CEO, called the comparison to the failed high street retailers as ridiculous pointing out that the new digital Argos stores were outperforming traditional sites and so more would be converted.

Argos are doing many great things, their digital offerings, speed of service for collections and new delivery services are all fantastic for consumers. Reportedly the high street is winning against Amazon in entertainment retail sales, with Argos’ share rising by a percentage point to a 4.2% market share.

I’d hate to see Argos disappear from the UK retail landscape and it would likely be devastating for eBay’s fulfilment plans. Is it a good strategy for eBay to exclusively partner with just one retailer? From the other side of the coin, perhaps the Argos strategy to partner with eBay for their next generation fulfilment service is part of their turnaround plan to extract full value from their recent investments?

Could Argos go pop? Possibly, but probably unlikely, Argos’s share price has been twice as high as it’s current value, but it’s also been almost half the current value in the not too distant past. Tony Shiret raised the question, let’s hope the answer is an resounding “No”.