UPDATE 2-Home Retail more pessimistic on consumer outlook

(Adds company, analyst comments, more detail, shares)

By Mark Potter

LONDON, June 12 (Reuters) - Home Retail (HOME.L), Britain's biggest household goods retailer, said it was more pessimistic about prospects for consumer spending, hitting its shares despite better-than-expected sales at its main Argos chain.

The group, which also runs the Homebase do-it-yourself chain, said on Thursday that rising inflation had reduced the chances of an interest rate cut, offering no relief to consumers suffering from rising food, fuel and mortgage costs.

"Our consumer outlook view going forward, and by that I mean probably more into 2009, is probably slightly more pessimistic than it was," Finance Director Richard Ashton told reporters.

Home Retail shares, which have more than halved in value over the past year, slumped 6.6 percent to 209 pence by 0755 GMT, having hit a new low of 207-1/2 pence, valuing the firm at about 1.9 billion pounds.

Amid mounting gloom over consumer spending, shares in Carphone Warehouse (CPW.L), Europe's biggest independent mobile phone retailer, plunged as much as 18 percent after it also expressed caution and reported falling demand for broadband Internet connections.

Landsbanki analysts said Home Retail shares looked cheap historically and compared to the rest of the retail sector.

"(But) we expect a further deterioration in trading conditions and so still see downside risks to estimates," they wrote in a research note, keeping a "hold" recommendation.

Sales at Argos shops open more than a year were flat in the 13 weeks to May 31, beating analysts' expectations of a fall of between 2 and 3 percent and also outstripping a household goods market which Ashton said was falling around 3 to 4 percent.

But sales were held up by "exceptionally strong" demand for games consoles such as the Nintendo Wii and Sony PS3 and related software, which have lower profit margins than most of Argos's other products.

Gross margins at Argos were down 125 basis points.

Ashton said the fall in gross margin offset the better-than-expected sales, and so the group was keeping its full-year profit expectations unchanged.

HOMEBASE

Home Retail is currently expected to make a profit before tax and one-off items of 370 million pounds for the year ending February 2009, down from 433 million the year before, according to the median forecast of 17 analysts polled by Reuters.

Like-for-like sales at Homebase, Britain's second-biggest home improvements chain, plunged 12 percent in the first quarter, worse than analysts' expectations for a drop of between 8 percent and 11 percent, due in part to poor weather.

Ashton said sales of seasonal items, such as garden furniture, plants and barbecues, were down 20 percent.

Gross margins at Homebase were up 125 basis points.

Home improvements chains have been hit particularly hard in the consumer downturn, as shoppers have cut back on expensive items like kitchens. Kingfisher (KGF.L), which owns UK market leader B&Q, cut its full-year sales expectations last week.

Home Retail shares have underperformed the DJ Stoxx European index .SXRP by about 39 percent over the past year and are set to leave the UK's benchmark FTSE 100 index .FTSE later this month.

Argos sells more than 18,500 items from over 700 shops, set out in twice yearly catalogues that the company estimates are to be found in around two-thirds of British households. Homebase runs more than 340 stores. (Editing by Louise Ireland)