Slump on the high street

Batten down the hatches – the economic storm that started in the US mortgage industry is heading up the UK's high street.

Yesterday's profits warning from DSG International, which includes Currys and PC World, is just the latest in a growing list of retailers feeling the pinch as house prices waver and consumer confidence hits what the British Retail Consortium (BRC) reckons to be a 15-year low.

DSG stock fell 8.46 per cent yesterday when its second profits warning in three months announced like-for-like sales down 1 per cent, gross margins down 0.3 per cent, and profit predictions of just £200m, compared with initial analyst forecasts of £300m. DSG has already revised its predictions downwards once this year. After a dismal Christmas, its shares plummeted by 27 per cent on the news that the group said it would miss full-year profit targets by £50m, largely due to a 10 per cent drop in sales at PC World.

John Browett, the chief executive, blames challenging trading conditions, particularly in the UK, Italy and Spain, and shoppers looking for bargains. "It is clear that customers have become increasingly promotion and deal driven, impacting gross margins."

It is growing increasingly hard to find an optimist. Sir Philip Green, the outspoken owner of BHS and Arcadia, told the World Retail Congress in Barcelona yesterday: "The market is probably as tough as I've seen it. Nobody is getting excluded from this."

And Ian Cheshire, the chief executive of Kingfisher – the retail group which owns B&Q – is predicting worse to come. "I'm sure markets are going to be pretty negative," he said. Kingfisher also saw 2.61 per cent knocked off its share price yesterday.

The trouble is that the credit crunch is squeezing consumer spending at both ends. Uncertain property prices mean harder times for related retailers like furniture shops, and shoppers feel less like they can afford to splash out. And with the banks themselves increasingly wary, there is less significantly less credit available for those consumers who do want to keep spending.

"There is the psychological element, as there always is in retail, but it is also about cold hard cash," David Bush, head of retail at Grant Thornton, the accountancy group, said. "Since October there has been a marked decline in both consumers' desire and ability to spend."

In the face of such pressures, the high street is turning into a free-for-all as stores try ever larger discounts to lure in hesitant shoppers and win what business there is from hungry rivals.

Anders Dahlvig, the chief executive of Ikea, said earlier this week that the Swedish furniture giant will have to keep reducing its prices in the face of tangible contractions in some of its major European markets, including the UK. "If we want to keep up growth, that is where we have to make investments," Mr Dahlvig said.

Price deflation of 0.5 per cent last month, as recorded by the BRC, bears out Mr Dahlvig's strategy. Stephen Robertson, the BRC director-general, said: "In the context of sales falling and consumers not wanting to spend, we are seeing a fierce competition between retailers that plays out to the advantage of customers."

Price cuts are a tried and tested strategy, but one that does not come without casualties – as DSG's margin-related woes exemplify. Almost a quarter of UK-listed retailers issued negative trading statements in the first three months of 2008, compared with just 10 per cent last year, according to Grant Thornton. And the cuts cannot be absorbed forever. Although there have not yet been major job cuts, retailers' cost structures are under the spotlight and there are reports of increasing pressure on training budgets, part-time staff positions, job creation schemes and overtime policies.

Yesterday's quarter point interest rate cut by the Bank of England will certainly be welcomed on the high street. But with more than one-in-ten of the UK's employed population working in the retail sector, the Government will need to maintain a watching brief to ensure the health of the economy as a whole, says Mr Robertson.

"These are early warning signs from the high street. The Government and the Bank of England need to respond, and do it swiftly," he said. "How bad things will get depends at least in part on how the economy is managed. Despite the danger of inflation, the danger of not maintaining a healthy economy is even more concerning."

But even recessions have winners, and in this case it could be the supermarkets. So far sales of essentials remain strong – although the fall in price inflation from February to March , despite rises in farm gate prices and import costs, suggests that food and drink retailers are also absorbing costs. But people will always need to buy food, and once in the shop are more likely to pick up cut-price non-food items at the same time.

"When the economy suffers people tend to shift downwards, buying their clothing at a supermarket instead of at a high street store," Ira Kalish, the director of consumer business at Deloitte Research, said.

A catalogue of retail woes

* DSG International is predicting profits of £200m for 2007, £100m lower than initial analyst expectations.

* Next, the 500-store fashion chain, expects sales to fall by 7 per cent this year.

* Land of Leather saw like-for-like sales down 15.4 per cent in January alone, and down 21.8 per cent in the preceding quarter. The board expects profits for 2008 will be "significantly below" the £16m pre-tax levels reported for 2006.

* ScS, another furniture chain, made a loss of £8.8m in the six months to January, compared with £3.3m of profits the year before. Like-for-like sales were down 16 per cent.

* Dolcis, the 144-year old shoe chain, went into administration in January, closing half its shops and cutting 600 jobs.

* Kingfisher group's B&Q DIY chain saw like-for-like sales down 1.7 per cent in the quarter to February.

* Home Retail, which also owns Argos, saw its Homebase business's total sales decline by almost 1 per cent in the eight weeks to March and like-for-like sales drop 5.3 per cent.

* Signet, the jeweller, reported like-for-like sales down by 6.7 per cent in the quarter to February, and total sales down 6.1 per cent. The company blamed major contractions in the US market and a slow Christmas in the UK.

* Beales, the department store chain, said last month that like-for-like sales were down and predicted it would fall short of expectations for the year ending last November.

* In January, JJB Sports' directors gave a cautious outlook for 2008 in a trading statement predicting second-half sales below last year's £27.4m.

* Blacks issued a profits warning in January following a drop in like-for-like sales of 10.8 per cent at its Freespirit and O'Neill brands. The company plans to cut costs by £3m.

* Moss Bros, which has its books open to Icelandic retail investor Baugur, saw flat sales last year and pre-tax losses of £1.4m.