Home Retail, Britain's top household goods retailer, posted big falls in underlying sales and profit margins at its catalogue-based Argos stores and Homebase do-it-yourself chain, hammering its shares on Thursday.
The firm said it was suffering as shoppers affected by the economic downturn cut back spending on non-essential items, and that profit margins had been hit by heavy discounting as it sought to compete with sometimes distressed rival businesses.
The company expected trading to be "extremely challenging" over the coming year, Chief Executive Terry Duddy said.
British sweets-to-DVDs chain Woolworths held a big clearance sale in the run-up to the key Christmas trading period as it went out of business.
Home Retail said it had offset the fall in sales and profit margins by cutting costs. It took on just over 10,000 temporary staff over Christmas, around half of the usual number, and also announced plans to close two distribution centres that will lead to the loss, or relocation, of around 350 jobs.
As a result, underlying profits for the year ending February were on track to meet analysts' consensus forecast of around 320 million pounds ($468 million), it said.
But some analysts were concerned about the outlook for next financial year, when Home retail said it would also suffer from the recent fall in the value of the pound, which raises import costs.
"We would expect that with renewed concerns over the gross margin there will be pressure on 2009-10 benchmark consensus say at around 10-15 percent downside level," Credit Suisse analysts said in a research note.
Home Retail Finance Director Richard Ashton told reporters that analysts' average forecast for 2009-10 profits was around 240 million pounds, but also said that brokers UBS and Merrill Lynch were cutting their estimates to around 200 million.
"We expect the trading environment for the next financial year to be extremely challenging," Chief Executive Terry Duddy said on a conference call.
At 0840 GMT, Home Retail shares were down 6 percent at 193.7 pence, the biggest fallers in the UK's benchmark FTSE-100 index . They earlier hit a six-week low of 187 pence.
MARGIN SQUEEZE
Britain's retailers are struggling as indebted consumers rein in spending amid rising unemployment, sliding house prices and fears of a deep recession.
Sellers of expensive and non-essential items are being hardest hit. DSG International, Europe's second-biggest electricals retailer, reported a 10 percent fall in underlying sales for the 12 weeks to Jan. 10.
Home Retail said sales at shops open at least a year fell 7.5 percent at Argos and 10.2 percent at Homebase in the 18 weeks to Jan. 3.
Analysts' average forecasts were for declines of 8 percent and 10 percent respectively, according to a company poll of 12 banks and brokerages.
CEO Duddy said sales of consumer electricals rose at Argos, while toys and jewellery were weaker and demand for homewares and furniture remained under most pressure.
At Homebase, kitchen sales rose, but were offset by falling demand for new bathrooms and flooring.
Gross profit margins at Argos, which sells around 18,000 products from over 700 stores, set out in twice-yearly catalogues, were down 1.25 percentage points, compared with a 75-basis-point decline in the six months to Aug. 30.
Gross margins at Homebase, which runs almost 350 stores and is Britain's second-biggest home improvements retailer behind Kingfisher's B&Q, were down 50 basis points after a first-half rise of 125 basis points.
Home Retail shares, which debuted at 420 pence when the group was born from the break-up of retail conglomerate GUS in October 2006, have underperformed the DJ Stoxx European Retail Index by 6 percent over the past year.
