UPDATE 2-Argos owner Home Retail braces for fall in profit

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

By Mark Potter

LONDON, March 13 (Reuters) - Argos stores owner Home Retail Group (HOME.L) is braced for a fall in profits and underlying sales this year, as indebted consumers cut back on spending and as recent interest rate cuts take time to reassure consumers.

"We're only beginning to feel the impact of the interest rate rises that were put through over the last 12-18 months," Terry Duddy, the chief executive of Britain's biggest household goods retailer told reporters on Thursday.

"So while the interest rate cuts are helpful to us, I don't think we're going to get that much benefit from those interest rate cuts through the current year that we're trading."

Finance Director Richard Ashton told reporters that analysts' consensus forecasts showed underlying profits falling from 429 million pounds ($864 million) in the year ended March 1 to 393 million pounds in the year to February 2009.

"What we are saying today is not meant to be interpreted as a more cautious view than that which we have previously provided, and as such we don't really expect changes to forecasts in the year just ended or the year just begun," he said.

At 0850 GMT, Home Retail sales were down 2.5 percent at 243.75 pence, underperforming a 1.7 percent fall on the UK's benchmark FTSE-100 index .FTSE and a 1.4 percent decline in the DJ Stoxx European retail index .SXRP.

Home Retail, which also runs the Homebase home improvements chain, is viewed as one of Britain's most vulnerable store groups to a downturn in consumer spending.

Its shares have fallen around 40 percent since October, prompting speculation they could become a bid target.

Duddy declined to comment on such speculation.

"With the worst of the current slowdown probably yet to impact, we still see downside risks in forecasts, particularly if the slowdown extends into 2009," Landsbanki analysts said.

CORE SALES TO FALL

Like-for-like sales at the catalogue-based Argos stores rose 1.9 percent in the eight weeks to March 1, an improvement on the 0.2 percent decline posted in the 18 weeks to Jan. 5.

But excluding the impact of promotional sales and Mother's Day, which did not fall within the same period last year, like-for-like sales were flat, Duddy told reporters.

Gross profit margins were down 50 basis points, hit by a bigger share of sales of lower-margin goods such as video games and consoles.

Like-for-like sales at Homebase were down 5.3 percent in the eight weeks, with strong demand for kitchens more than offset by weakness in other high-value ranges, such as bathrooms.

Duddy said analysts were expecting like-for-like sales to fall around 2 percent at Argos and about 4 percent at Homebase in the year to February 2009, which he said seemed "sensible views at this stage of the year".

Cazenove analysts said Home Retail shares were trading at just 7.5 times their earnings forecast for 2008-9, "suggesting a far worse forward earnings profile than we feel can be rational". This compares with an average of 13.6 times for major European retailers, according to Reuters data.

"The problem in the short term is that investors are evidently afraid to make a call on the macro vs valuation imbalance," the Cazenove analysts wrote in a research note.

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, with more than 300 stores, is Britain's second-biggest home improvements chain, behind Kingfisher's (KGF.L) B&Q. (Editing by Will Waterman)