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UPDATE 4-DSG to cut more costs as sales fall worsens

Published 01/15/2009, 06:25 AM
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* Xmas lfl sales down 10 percent, gross margins down 0.8 percent

* Further current year cost cuts of 20 million pounds

* Operating within 400 million pounds credit facility

* Sees "challenging" 2009

* Shares down 7.5 percent at 1120 GMT (Adds CEO, FD comments, updates shares)

By James Davey

LONDON, Jan 15 (Reuters) - DSG International Plc, Europe's second-biggest electricals retailer on Thursday reported a further deterioration in sales and profit margins for the key Christmas period and said it was planning further cost cuts.

"We expect 2009 to be challenging across most of our markets," said Chief Executive John Browett, adding that his renewal and transformation plan for the group was "on track".

He told reporters DSG expected "high single digit" negative like-for-like sales throughout 2009 but was budgeting the business to survive much worse.

"What we're not expecting to see is some kind of disastrous slump of biblical proportions, we're expecting to see a normal recession," he said.

"We've very carefully tracked this recession compared to previous ones and it's following the normal cycle. It doesn't look like it's out of the ordinary.

In response to the trading environment DSG has identified a further 20 million pounds ($29.23 million) of cost savings, bringing total savings for the year to the end of April 2009 to 95 million pounds.

Browett said the savings would be across "every single aspect" of the business. He said jobs would go through "natural churn" rather than a big redundancy programme.

Prior to Thursday's update shares in DSG had slumped 74 percent over the past year, hit by the consumer downturn, worries over U.S. rival Best Buy's entry into Europe and concerns over the withdrawal of credit insurance for suppliers.

At 1120 GMT the stock was down 1.5 pence, or 7.5 percent, at 18.75 pence, valuing the business at 327 million pounds ($485.3 million) -- just two weeks' sales.

The firm, whose store chains include Currys and PC World in Britain, Elkjop in the Nordic region and UniEuro in Italy, said its sales at stores open at least one year fell 10 percent over the 12 weeks to Jan. 10.

This compares to analysts' forecasts of a drop in like-for-like sales of between 7 and 12 percent, and a fall of 7 percent in the first half to Oct. 18.

Many UK retailers are struggling as consumers rein in spending amid sliding house prices, soaring unemployment and fears of a deep recession. Retailers of big-ticket discretionary items have been particularly badly hit.

On Thursday Argos, the high street catalogue retailer, reported a 7.5 percent fall in like-for-like sales for the 18 weeks to Jan. 3.

MARGINS DOWN

Gross profit margins were down 0.8 percent year on year, having been down 0.7 percent in the first half, reflecting the increased proportion of revenue in the sale period as customers waited to buy discretionary products, particularly televisions and laptops, at cut-down prices.

Browett's plan is focused on cash, cutting costs, managing margins and reducing stock. Stock levels were 16 percent lower than last year.

He is also working to improve customer service and is developing new format stores. DSG said these performed well with sales 15 percent to 25 percent ahead of the rest of the chain.

In November, DSG, which operates 1,200 shops and online stores in 28 countries, swung to a first-half loss and suspended its dividend. It ended its first half with a net debt of 149.5 million pounds.

The company said on Thursday it was operating within its 400 million pound committed credit facility, which was currently undrawn and available, although it anticipated some drawdown would occur in its final quarter.

"I think at year-end we will be between 150 and 200 million pounds drawn down," said Finance Director Nicholas Cadbury.

Analysts at Citi said in a research note they expected consensus pretax profit forecasts for the current year to fall about 20 percent to about 50 million pounds. In the previous year DSG made 205 million pounds.

"As one of the most operationally leveraged and financially leveraged businesses in our general retail coverage universe, DSG is very materially impacted by the current cyclical slowdown/recession," they said.

Some analysts reckoned DSG would be lucky to break even in the year to end-April 2010. ($1=.6841 Pound) (Editing by Hans Peters and Jon Loades-Carter)

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