Dismay as Dixons confirms poor Christmas with shock profits alert

High Street Gloom: Poor sales of consoles may be a harbinger of a wider slowdown in retail spending

Dixons sparked a sell-off in retail shares yesterday after the electrical stores group issued a shock profits warning and made gloomy predictions about the outlook for consumer spending.

Dixons shares fell 21 per cent to a five-year low of 116.5p when the company said it would miss profit forecasts for the current year due to falling margins and weaker-than-expected sales in the run-up to Christmas. The comments hit shares in rival retailers such asKingfisher and Carphone Warehouse, while shares in Marks & Spencer, Boots and Woolworths also fell sharply.

Dixons said its sales in December were below expectations due to weak sales of computer games and consoles while sales of extended warranties also fell in the face of an investigation by the Competition Commission.

Like-for-like sales in the UK in the eight weeks to 4 January showed no growth on last year while gross margins were lower due to the sale of a greater proportion of pre-paid mobile phones as opposed to more profitable fixed contracts. Dixons, which also includes Currys, PC World and The Link, said the January sale had started well but it remained cautious about the outlook.

John Clare, the chief executive, said: "We don't think our numbers are desperately bad but for three weeks in December we didn't see the consumer out there in the same numbers."

Explaining the change, he said: "Last December mortgage holders [on annual deals] got a letter saying their interest rate was going to be lower after the autumn reductions. I'm certain now that this had an impact on December spending last year because people were better off. We have a very different climate today. The consumer is starting to be affected by tax rises and pensions publicity. They don't feel as confident as last year. We feel quite cautious about big ticket items in particular."

With Next also reporting weak sales yesterday, one retail analyst said: "What you've got is two of the best retailers in the sector saying they've done flat like-for-likes in an environment which has low mortgage rates, low unemployment and booming house prices. God help us when things get really bad."

Mr Clare said Dixons would not now pursue an acquisition of Darty, the French electrical division being sold by Kingfisher, unless the economic outlook brightened. "Given the uncertainties we intend to focus on our existing UK and international businesses for the immediate future," he said. "Now is not the time to make another big European acquisition."

Kingfisher said it remained on course to separate its electrical division, which also includes Comet in the UK, by May. A demerger on the Paris stock market is the favoured route if no trade bidder emerges.

Dixons, which saw its founder Sir Stanley Kalms retire in September after 50 years with the group, said the weak performance from computer games had caught it by surprise.

Merrill Lynch said Dixons' gross margin attrition was a major concern as "the past 10 years shows that once lost, gross margin tends not to be recovered".

Mr Clare admitted this and said the cut-throat market meant it was unlikely to be able to raise prices. Jeremy Darroch, Dixons' finance director, said the group would look to improve its cost-to-sales ratio by reducing costs in distribution, systems and service support. Merrill Lynch has cut its full-year profit forecast from £321m to £290m.

Dixons also reported half-year results for the six months to 9 November. These showed an 8 per cent increase in pre-tax profits to £94.8m with like-for-like sales up 5 per cent on last year.