B&Q admits to 'challenging' retail environment as UK sales fall 1.2%

Gerry Murphy admitted to his first major setback since he became chief executive of Kingfisher two years ago, after the retailer revealed a drop in UK sales.

The company shocked investors yesterday with news that its core B&Q chain of DIY outlets in the UK had been hit by a 1.2 per cent fall in underlying sales in the fourth quarter of its financial year.

Mr Murphy saidintense competition from rivals, a tightening of consumer spending and operational problems had led to the decline. He said it was "fair to say" the news was his first significant setback.

He added: "I won't be getting too depressed about it. It's just one quarter's performance. It's not a disaster by any means." Mr Murphy said January promotions in the bathrooms and kitchens sector had been particularly "aggressive", noting that B&Q had suffered where its ranges were not up to date.

Kingfisher shares fell 2.4 per cent at 295p yesterday. Analysts had been expecting B&Q to be flat or marginally positive for the period, the 13 weeks to 29 January.

Mr Murphy said this year would remain "challenging", with cost pressures and "tight" selling prices. B&Q was in a position to keep costs under control and stimulate demand, he said, pointingto product launches due this year, including DIY air-conditioning and granite work-top ranges.

B&Q has launched a "Price Reverse" promotional campaign - which lowers prices on 5,000 items. Analysts said the scheme should help the chain return to positive territory. Matthew McEachran, at Investec Securities, said much depended on whether the early Easter is accompanied by decent weather.

Its rival, Homebase, owned by GUS, recently reported a 4 per cent rise in like-for-like sales. Mr Murphy denied suggestions that Kingfisher had become distracted by its global operations, which stretch from Poland to China. "We run our international businesses quite differently. We have strong manage- ment teams in each market. There is zero impact on B&Q from whatever is happening in China," Mr Murphy said.

In the international operations, there was better news and Kingfisher insisted it would meet City expectations for the overall group for 2005.

In France, trading at Kingfisher's Brico-Depot chain was up 16 per cent on a like-for-like basis, although this was offset by a 0.9 per cent decline at Castorama, which was blamed on store refits and product relaunches.

Elsewhere, with the exception of Poland, overseas sales grew strongly, with Italy and China doing particularly well.

Analysts at Dresdner Kleinwort Wasserstein said: "We like Kingfisher's international growth strategy but greater attention needs to be applied to the core business."