* To announce plan for revamped stores on March 3
* Analysts say may need rights issue, asset sales
* European electrical goods market seen shrinking
By Mark Potter and James Davey
LONDON, Feb 24 (Reuters) - DSG International Plc, Europe's No.2 electricals retailer, is betting on revamped stores to revive its fortunes, but a consumer downturn, questions over funding and growing competition mean it faces an uphill battle.
Analysts think DSG, which runs Currys and PC World stores in Britain, may need to raise about 200 million pounds ($291 million)to fund store upgrades through a cash call to shareholders, selling off assets or a combination of the two.
But this could prove tricky for a company suffering from structural market changes -- such as competition from the Internet and supermarkets, and overcapacity in some countries -- and which faces the arrival of U.S. group Best Buy Co Inc, the world's top electricals retailer, in Europe later this year.
"Refurbishment may not be enough," Bank of America-Merrill Lynch analysts said in a research note this week, ahead of a presentation by DSG next Tuesday on its turnaround plans.
Electrical goods retailers have been hit hard by an economic downturn in which shoppers have cut spending on expensive and non-essential items and banks have reined in lending. Circuit City, the U.S. No.2 electrical goods retailer, filed for bankruptcy protection in November.
Yet despite such a negative backdrop DSG shares trade at around 12 times forecast fiscal 2009 earnings, a premium to the UK sector on about 10 times, according to Reuters data. Of 23 analysts expressing a view on the stock, 18 rated it "hold", "underperform" or "sell".
In Europe, retail research group Verdict estimates the electrical goods market, worth 171.2 billion euros ($218.1 billion) in 2007, contracted 1.5 percent in 2008 and is headed for another difficult year in 2009.
"On top of everything else, there's a weak technology pipeline at the moment," said Verdict analyst Daniel Lucht. "People have got their flat-screen TVs, sat-navs and MP3 players, and even gaming looks like it will come off the boil."
Some retailers have coped better than others.
Media Markt/Saturn for example, Europe's biggest electrical goods retailer, owned by German retail group Metro AG , has benefited from the success of its megastores and, until recently at least, from fast growth in eastern Europe.
DSG, by contrast, runs mostly smaller stores and is heavily exposed to the UK where it faces stiff competition from the likes of Comet, part of Kesa Electricals Plc and Argos, a unit of Home Retail Group Plc.
OPTIONS LIMITED
DSG Chief Executive John Browett unveiled a turnaround plan in May 2008 focused on cutting costs, improving customer service and stores and developing the group's online business.
Analysts have generally welcomed the revamped stores, which include a new flagship 55,000-square-foot Currys megastore in Birmingham, central England, as well as more products, more interaction and demonstration areas in smaller outlets.
DSG has said the refitted shops are generating 15 to 25 percent more sales than their respective chains and says it will lay out its plans for further expansion next Tuesday. Analysts' concern is how it is going to pay for this investment.
DSG shares plunged as much as 90 percent in 2008 on fears it might breach its bank agreements. Its market value of 363 million pounds is equivalent to less than three weeks sales.
DSG's credit default swaps are among the 25 company contracts trading "upfront" in Europe's Crossover index, signalling a higher perceived risk of default.
Credit Suisse analysts said DSG played down funding concerns at a recent meeting. But many think the group will have to ask shareholders for money to fund its store improvement programme and, amid a raft of UK equity fundraisings, this could be hard.
"We expect the market to be less enthusiastic about the prospect of a DSG rescue rights (issue) than for retailers struggling predominantly as a result of an inappropriate capital structure," Numis Securities analysts said in a research note.
Other options for DSG, which runs 1,200 shops and online stores in 28 countries, include selling off assets such as its Scandinavian business Elkjop -- considered by analysts to be the jewel in the group's crown.
DSG said last year it was reviewing its loss-making UniEuro and PC City chains in Italy and Spain, as well as Electro World in central and eastern Europe. But analysts see few obvious buyers and reckon an exit will be expensive.
"It could well cost DSG up to 300 million pounds to get rid of the loss-making European disasters," said Nick Bubb, retail analyst at Pali International.
Even if DSG can find the money, some analysts are sceptical whether revamping smaller stores will make a difference when Best Buy will enter the UK with 30,000-square-feet megastores.
DSG is already downsizing its city centre Currys.digital estate. But with its commitments on leases, its options for more drastic surgery are limited, meaning that a recovery -- if it is to come -- is likely to take several years. (Editing by David Holmes) ($1 = 0.6869 pound) ($1 = 0.7848 euro)