Retail sector feels the shockwaves as Matalan shares collapse 34%

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The Independent Online

Investor sentiment towards the UK retail sector hit fresh lows yesterday when three of Britain's biggest high street groups issued disappointing Christmas trading updates.

Investor sentiment towards the UK retail sector hit fresh lows yesterday when three of Britain's biggest high street groups issued disappointing Christmas trading updates.

Matalan, the out of town discount retailer, was the hardest hit. Its shares lost half their value in early trading after the former stock market darling said margins would be affected following a slump in sales in November. The shares recovered some of the lost ground to close 34 per cent lower at 480p, although analysts said it would be difficult for it to regain its former glamour rating.

Next, the high street fashion retailer, was also punished after Christmas sales came in below expectations. Next stores were left with excess stock after Christmas, forcing bigger markdowns in the winter sale and a £4m exceptional charge. The shares shed 15.5p to 781p.

Great Universal Stores, owner of the Argos and Burberry businesses, saw its shares plunge 16 per cent after warning that its Experian financial information business in the US was being affected as customers reacted to the slowing American economy. The fall came despite solid growth at Argos.

The three announcements sent shockwaves through the sector with shares in other big retailers such as Marks & Spencer, Kingfisher and Debenhams, also falling sharply.

Some City analysts said the stock market had over-reacted. Nick Bubb, at SG Securities, said: "I think it has all got a bit hysterical. People are still buying clothing and retailers held their nerve this year by not cutting prices before Christmas. What the market may have under-estimated is the damage caused by a weak November."

Tony Shiret, at Credit Suisse First Boston, said the share price carnage was more a case of "great expectations being dashed" rather than the start of a major high street slowdown. However, he had harsher words to say about Matalan. "The market has moved from thinking this could be the next Wal-Mart to thinking it is the next Hennes & Mauritz [whose shares have halved in a year]," Mr Shiret added that Matalan's shares could fall as low as 200p-300p.

Matalan's Christmas trading update showed that in the six weeks to January like-for-like sales grew by 16.3 per cent on last year. But underlying sales in November showed year-on-year growth of just 5 per cent rather than the forecasts 15 per cent after the company cut marketing budgets. The sales shortfall left Matalan with excess stock that had to be discounted in the sale, squeezing margins. The company admitted that some new stores had also opened late resulting in further lost sales.

The update forced the company's house broker UBS Warburg to cuts its full-year profits forecast from £90m to £83m. However, the company seemed perplexed by the savage fall in its share price. Ian Smith, finance director, said: "These are the best trading statistics the market has seen this Christmas and our shares have halved. It's a tad surprising."

The profits warning represents Matalan's first setback since it came to the stock market nearly three years ago. In that time the shares soared from an adjusted 42p to a peak of 800p late last year as the market fell in love with the group's apparently irresistible combination of clothing and household goods sold at rock bottom prices from out of town stores. Matalan's soaraway success were seen as a contributory factor to the woes being experienced by mainstream UK clothing retailers such as Marks & Spencer, Arcadia and Littlewoods.

Next's trading statement showed like-for-like sales in the 19 weeks to 24 December were 6 per cent up on the same period last year. Sales at the Next Directory catalogue were 12 per cent higher. "I think consumer confidence is fairly fragile but I believe Next has the ingredients to do well," David Jones, chief executive, said.

At Great Universal Stores a decent UK performance was overshadowed by a slowdown in its US financial information operation. Argos' sales at Christmas were 6 per cent ahead of the previous year on a like-for-like basis with strong performances in electricals, furniture, mobile phones and jewellery. The mail order catalogue unit saw sales down 5 per cent on the previous year, in line with forecasts.

David Tyler, GUS' finance director, said: "Consumer confidence, as a whole, is fine. There is a change in mix with people spending more on mobile phones and Sky TV subscriptions. So it depends which bits of the market you are in."

Clinton Cards said Christmas sales were up 6 per cent on the previous year on a like-for-like basis. But Alexon, which owns Dolcis shoe shops, was held back by weak sales at its Bay Trading fashion business and at its menswear concessions operation. The shares closed 6p lower at 53.5p