Top retailers hit by new year sales slowdown

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Three large retailers flashed the warning sign on interest rates to the Bank of England's Monetary Policy Committee yesterday when they reported a sharp slowdown in sales. On the day the committee began its two-day meeting on interest rates, MFI, Carpetright and DFS, the furniture retailer, all said sales had been weak in late January and through February. Shares in all three fell sharply as analysts cut their profit forecasts.

MFI was the worst hit with its shares diving 23 per cent to 98p. DFS shed 21 per cent to 463.5p while Carpetright gave up 15 per cent to 422.5p. The warnings dragged down shares in other durable goods retailers such as Allied Carpets, Dixons and Kingfisher.

Richard Edwards, retail analyst at Salomon Smith Barney, said the slump in demand for more expensive purchases such as sofas and carpets could affect the decision on rates. "This sends an interesting message to the Bank of England. Any "big ticket" stuff is dying. It is only the smaller item retailers such as the DIY stores that are doing well."

Tony Shiret, retail analyst at Credit Suisse First Boston agreed: "It probably reduces the need for an interest rate rise. Expectations had been bloated by the windfall factor of last year but underlying demand does not look that good." Analysts said they expected more durable goods retailers to issue similar warnings. "There are probably more in the pipeline," said Mark Josephson of Panmure Gordon.

MFI, the kitchens and furniture group said trading in its key winter sale had been below expectations and specifically blamed higher interest rates for the malaise. DFS warned that this year's profits would be flat and said the whole furniture sector was suffering. Later in the day Carpetright issued its own warning saying it had suffered a slowdown and that sales had not met expectations in the last 10 weeks.

John Randall, chief executive of MFI said homeowners whose mortgages payments are adjusted by annual reviews would have been informed in January of their new payments which he said could rise by around 20 per cent from April. Mr Randall said MFI had enjoyed three good weeks after Boxing Day but since then "everything has fallen away." He said the short term outlook was "not particularly buoyant."

MFI said sales in the 16 weeks to date were up by just 2 per cent. Analysts cut their profits forecasts from pounds 85m to pounds 62m.

The news was equally grim at DFS, the furniture group run by Sir Graham Kirkham. It said its profits for the six months to January "will not exceed the pounds 18.7m reported last year". It said sales had started well in its financial year which starts in July but had been badly affected by the death of Princess Diana in August and remained sluggish for several weeks afterwards. It added that while its January sale had started strongly, sales had then fallen back.

Sir Graham said it was not just DFS that was suffering: "There is evidence that trading conditions are tough across the whole furniture industry and that DFS is continuing to gain market share." Analysts have cut their full year forecasts from pounds 46m to pounds 38m.

Carpetright said its sales had not met expectations. "From being 8 per cent ahead on a like for like basis sales have not met anticipated levels during the last 10 weeks," it said.

"Trading conditions in the carpet market are tough, but Carpetright and Carpet Depot are continuing to pick up market share. Margins remain strong despite the market climate and continue to be above last year's levels," it added.

The company expected to be trading from around 300 Carpetright and Carpet Depot stores by its year end and anticipated opening around 20 stores next year.

Carpet and furniture retailers enjoyed a good year in 1997 boosted by relatively low interest rates and the benefits of windfall payouts from de-mutualising building societies. But as interest rates rose and consumers appeared to save a high proportion of their windfalls many retailers have feared a slowdown.