Arcadia shares tumble on warning of profits fall

ARCADIA, the UK's second largest clothing retailer which owns Top Shop, Dorothy Perkins and Burton, yesterday warned that half-year profits would fall below expectations unless trading conditions improved.

Arcadia said price discounting and promotions were driving margins lower although sales density was up 0.5 per cent in the first 11 weeks of the financial year. The news sent the group's shares tumbling 29.5p to 107.5p.

Arcadia said: "The directors believe that the trading performance, if sustained throughout the half, would result in first-half profits below expectations."

Arcadia said there were no plans to change strategy. "We intend to focus on pushing forward our pricing policy, and improving the performance of some of our weaker brands," it said.

Analysts said Arcadia is particularly vulnerable to market pressures because it is so highly operationally geared.

Matthew McEachran, of Investec Henderson Crosthwaite, also suggested that the group's acquisitive strategy had contributed to its problems. "You have to question the focus of a company with so many brands," he said. He added that many would favour the disposal of the company's non- core brands and stores, but Arcadia is restricted by its leasehold agreements.

Arcadia was formed last year following the demerger of Debenhams from Burton Group. Earlier this year, Arcadia bought womenswear stores including Wallis, Warehouse and Miss Selfridge for pounds 150m. Arcadia last month reported annual pre-tax profits of pounds 46.1m, down from pounds 81.1m a year earlier. Analysts have adjusted forecasts for the coming year from pounds 44m-pounds 66m, to between pounds 25m and pounds 40m.

Speculation was mounting yesterday that John Hoerner, Arcadia's chief executive, may be feeling pressure to resign. One analyst said: "He must be getting fed up. He has given the business his best shot, but he is struggling to see the light."

The London Stock Exchange is expected to investigate an 8 per cent drop in Arcadia shares on Wednesday afternoon.