UPDATE 2-Home Retail urges help for consumers as sales dive

Thu Mar 15, 2012 5:15am EDT

* Argos Q4 like-for-like sales down 8.5 pct

* Homebase Q4 like-for-like sales down 6.5 pct

* Sees full-year profit in line with expectations

* Sees another, though smaller, fall in profits this year

* Shares down 0.7 pct vs flat European retail sector

By Mark Potter and James Davey

LONDON, March 15 (Reuters) - Home Retail, Britain's biggest household goods retailer, urged the government to take steps in its budget next week to boost the incomes of lower and middle earners as it forecast a fifth consecutive year of falling profits.

The owner of catalogue-based Argos stores and the Homebase do-it-yourself chain said on Thursday there were reasons to be more optimistic about the retail outlook for the coming year, with inflation falling and events such as the Olympic Games in London and the Queen's diamond jubilee likely to boost spending.

However, it said it was planning cautiously after a big drop in sales at both Argos and Homebase in the 8 weeks to Feb. 25.

"What we totally agree with is the increase in the personal allowance," chief executive Terry Duddy told reporters, referring to proposals by Britain's coalition government to raise the threshold at which people start paying income tax.

"We think that's an important factor and would lead to an easing for the circumstances that people have got where they've just seen disposable income falling."

Britain's retailers are mostly struggling as disposable incomes have been squeezed by rising prices, muted wages growth and austerity measures, and shoppers fret about rising unemployment, a shaky housing market and the euro debt crisis.

Argos has been particularly hard hit because its mainly low-income customers have suffered most and because it also faces stiff competition from grocers, specialists and the internet.

Sales at Argos stores open over a year dropped 8.5 percent in the eight weeks to Feb. 25, broadly in line with a drop of 8.9 percent over the 52 weeks ending on the same date.

Duddy said shoppers were particularly cutting back spending on electrical goods like televisions and video games, with sales of the latter down 35 percent in the eight-week period.

Like-for-like sales at Homebase, Britain's No.2 home improvements retailer behind Kingfisher's B&Q, slumped 6.5 percent in the quarter, worse than the full-year decline of 2 percent as sales of furniture, kitchens and bathrooms suffered.

The firm said it was on track to meet analysts' expectations for a full-year underlying profit of around 100 million pounds, which would be down sharply from 254 million the year before.

Finance Director Richard Ashton said it was reasonable to expect another, albeit more modest, decline in the current financial year, noting that analysts' average forecast was for an underlying profit of around 80 million pounds.

CLOSING STORES

"There are people who've said they could get to some cautious optimism in the second half," Duddy said, referring to falling inflation and events like the Olympics and jubilee.

"We wouldn't disagree with them, but from our point of view we'd be better with a cautious plan rather than banking to upsides that may or may not occur," he added.

Espirito Santo analysts said it was good news Home Retail had avoided another profit warning, but saw little scope of a quick recovery.

"Trading remains tough and there is a long way to go before we begin to see margins recover at Argos, in our view," they wrote in a research note.

Home Retail shares, which have lost nearly half of their value over the last year, were down 0.7 percent to 114.2 pence by 0850 GMT, lagging a flat European retail sector.

American John Walden started as Argos's new managing director last month and has been given a free rein to examine all options for the struggling business, including closing some of its 748 shops.

Home Retail said it shut a net 11 stores in the fourth quarter as leases came up for renewal.

Duddy said 35 stores were coming to the end of their leases this financial year, and a total of 185 over the next five years. However, while the group was likely to close some of these, he stressed that it would retain many of them and was not going to embark on a rapid closure programme, that would be costly if leases were ended early.

Home Retail warned in January it would cut its full-year dividend for the first time since it listed in 2006.

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