Body Shop warning delivers body blow to investors

The Body Shop shocked its City fan club by issuing a profits warning one day after its shares hit a record high. The ethical beauty products retailer blamed poor sales in the UK and US, its two biggest markets, which failed to offset costs of £4m.

The company is the second major Christmas casualty after JJB Sports. Its shares, which have soared for three years, sank 18 per cent to 220p, wiping more than £100m off its valuation.

The Body Shop was a rare retail success story during 2005 after attempts to move the brand more upmarket paid off. But it set its sights too high going into Christmas, which meant a 1 per cent rise in UK like-for-like sales during the 10 weeks to 31 December missed expectations.

It suffered more in the US, where flaws in its supply chain that left stores short of stock caused a 4 per cent decrease in underlying sales. The shortfall meant it could not absorb £4m of one-off costs, which it flagged for the first time yesterday. The company's house broker, Merrill Lynch, said it was slicing 20 per cent off its underlying profit forecast, acknowledging in a research note that investors will "quite rightly take fright at the decimation of near-term forecasts".

Peter Saunders, the chief executive, said the weak performance in its most important markets "underplays our potential". He said "action plans" were in place to fix the supply chain issues, although he did not say if any heads had rolled.

The company denied that its image had taken a tumble, pointing to better results from outlets around the world. Sales in Asia rose 7 per cent, buoyed by a 10 per cent rise in Japan. It was encouraged by continued growth from its Body Shop at Home format, which is a 21st-century version of the Tupperware party with Body Shop cosmetics. Sales growth from the division accelerated, rising by 17 per cent during the period, and by 26 per cent in the UK.

There was further disappointment from Matalan, the discount retailer that is struggling to hold its own in an increasingly competitive marketplace. Weak sales of its homeware lines hit its profit margin as it was forced to promote heavily to clear unpopular products. Its core clothing business fared better, but group like-for-like sales fell 5.5 per cent during the 10 weeks to 7 January.

That left Mothercare and Peacock, which is soon to be taken private by its management, to paint a brighter picture. Mothercare said its 0.7 per cent rise in underlying sales for the quarter to 6 January put it on track to hit City forecasts, while Peacock shone with a 6 per cent rise in like-for-like sales during its final three months as a quoted company.