Matalan to step up price war despite profits slump

Matalan, the value retailer that issued two profit warnings either side of Christmas, yesterday insisted it had turned the corner as it pledged to step up its price war against the high street.

The out-of-town stores group, which saw its competitive advantage against high street rivals wiped out during the crucial festive season, yesterday said underlying sales had risen by 3.1 per cent during the past nine weeks. This was despite a "difficult Easter", it added. Its shares rose 1.25p to 173.25p.

John King, the chief executive, said 10 per cent lower average selling prices and better ranges helped lure customers away from town centre rivals in recent weeks. He said the company accepted that heightened price competition was "a way of life going forward". He added: "We will maintain our value proposition. If we need to cut prices, we will."

His comments came as the company revealed its preliminary pre-tax profits almost halved last year to £60.7m, dragged down by poor marketing, availability and a £5m one-off charge. Like-for-like sales for the 12 months to the end of February fell 6.5 per cent. A few years ago its underlying sales were growing by 20 per cent.

John Hargreaves, the group's founder and chairman, said the results were "deeply disappointing" but added: "I believe the building blocks for a recovery are in place."

Matalan signalled confidence in its recovery by opting to maintain its final dividend at 5.4p. This means its dividend cover for the current year will fall to just under 1.5 times. Some analysts predicted the company would slash its payout to as little as 3.7p.

Mr King said the company, which is some 50 per cent cheaper than the high street, would continue to invest in lower prices. Price deflation of about 3 per cent contributed to the group's lower average selling price during the past nine weeks, he added. He said the fact that the company's previous management allowed prices to drift up - by 4 per cent during 2002 - had contributed to its poor results last year. "That's not what value retailers should be doing," he added.

The company said it would roll out a new look for its 178 stores over the next three years after discovering that a more modern environment attracted more shoppers. Underlying sales at the three sites it has refurbished outperformed its average stores by 5 per cent during the past nine weeks.

Although the company has its eyes on 10 of the big W out-of-town sites being sold by Woolworths, Mr King said it would not "buy sites at any price", predicting the sale process would become "an auction between Asda, Boots, Next et al".

Matalan is planning to replace all three of its non-executive directors this year.