Woolworths shares dive to all-time low after warning of 'marked' downturn

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Woolworths had a day to forget yesterday, when it posted a profit warning, revealed dire recent trading, and tore up plans to sell its £200m stake in DVD publisher 2 entertain.

City analysts are forecasting that Woolworths Group will struggle to break even at group level this year, and some expect it not to pay a dividend for the 12 months to the end of January.

Shares in the group, which operates 800 UK stores, fell 14 per cent, or 0.9p, to close at an all-time low of 5.5p.

For the six weeks to 26 July, Woolworths' retail division posted like-for-like sales down 6.7 per cent. Woolworths' chairman Richard North stressed that this year's figures were up against strong sales of the final Harry Potter book logged in the same period of last year.

Mr North said the group's retail business had seen a "marked worsening of conditions in June and July".

He added: "It is clearly a challenging environment out there. The key thing is that shoppers are looking for value. The consumer is keeping things pretty tight – they are only buying what they need to buy."

Woolworths said it expects "disappointing" margins for the first half of its financial year, at about 125 basis points below last year's, due to a higher proportion of sales from lower margin CDs and DVDs and a lower proportion from higher margin items such as clothing. The few bright spots highlighted by Mr North included sales of computer games, up by more than 30 per cent so far this financial year, and a robust performance from snacks and confectioneries.

Nick Bubb, an analyst at Pali International, said: "There is always something going wrong. Like-for-like [sales] down 6.7 per cent is pretty rotten when their costs are rising and margins are falling."

Mr North outlined the preliminary version of a rescue plan for Woolworth's retail operations which would bring into focus small and medium-sized stores rather than the larger stores. This rescue plan has raised eyebrows in the sector, as it comes little more than one month after Woolworths said chief executive Trevor Bish-Jones is to step down in the autumn.

Mr North said the review, carried out by an unnamed firm of strategy consultants, also highlighted opportunities for improved stock management. The company is to provide further details at its interim results announcement on 17 September. Panmure Gordon analyst Philip Dorgan said a new chief executive will "doubtless be unimpressed by the board's strategic review". He said: "Woolworths' trading statement is dreadful. Sales at all divisions are worse and we expect accelerated losses in the first half and zero profit before exceptional items for the year."

For the 25-week period to 26 July, Woolworths' wholesale entertainment businesses, Entertainment UK and Bertrams, posted sales down by 1 per cent.

Sales at 2 entertain, Woolworths' joint venture with BBC Worldwide, rose 12.8 per cent for that 25-week period to 26 July, although this was sharply down from the 29.8 per cent rise in the 19 weeks to 14 June.

Mr North said Woolworths had calculated that it could deliver greater value by holding on to its 40 per cent in 2 entertain, which has been valued at £200m. "We have reached a point where we are better off retaining it than looking to dispose,"he said.

Mr Bubb said: "The situation looks hopeless." He explained that if Woolworths cannot add value by breaking up the group – as selling 2 entertain to get rid of debt would just leave a lossmaking retail chain and a volatile entertainment wholesale arm – then the group's "shareholders only have a long lingering death to look forward to."

Milestones on the high street

* 1909: Frank Woolworth founded FW Woolworth, a subsidiary of its US parent, in the UK. The first store was in Liverpool.

* 1980s: Woolworths rationalised its offer into clearly definedcategories including entertainment, home, kids (toys and clothing) and confectionery.

* 1982: Paternoster Stores, the forerunner to Kingfisher, acquired British Woolworths.

* 1986: Kingfisher acquired Woolworths' biggest record supplier, Entertainment UK.

* Late 1990s: Woolworths launched other retail formats, including the first big W store in 1999 and Woolworths General Store in 2000.

* 2001: Woolworths Group plc began trading as a listed company on the London Stock Exchange after demerger from Kingfisher.

* 2002: Trevor Bish-Jones is named chief executive.

* 2005: Private equity group Apax made a takeover approach but walked away.

* 2006: Unity, a consortium led by Baugur, the Icelandic investment group, grows its stake in Woolworths to beyond 10 per cent.

* June 2008:Woolworths reveals thatMr Bish-Jones is to step down in the autumn.