Woolworths confirmed yesterday that the Christmas spending spree had not continued into the new year as it warned of tough high street conditions for 12 more months.
The retailer expected consumer spending to remain depressed and competition to be fierce as it revealed annual profits fell 15 per cent to £57.7 million and like-for-like sales dropped 3.9 per cent.
Turnover was down 4.1 per cent to £2.63 billion.
Trading since the end of J anuary had been slow although Woolies did not provide precise figures because sales at the same stage of last year were inflated by Easter.
The firm, whose 800 stores are highly dependent on seasonal spending, joins retail rivals such as Next in painting a bleak picture of consumer confidence.
Trading was toughest at its core Woolworths estate where demand was below the levels seen during 2004 for most months, with sales of clothing particularly poor because of price cutting elsewhere on the high street. Sales of entertainment products were harmed by an uninspiring line-up of new releases and price deflation, although Woolies said more toys were shifted than a year earlier and at stronger margins.
The firm added that its entertainment wholesale and publishing businesses, which include EUK and its 2entertain joint venture with the BBC, grew profits by 14.9 per cent to £56.4 million.
The fastest growth was seen in the computer games market, but the growing appeal of music downloading meant sales of CDs at EUK were under pressure.
Chief executive Trevor Bish-Jones said the tough conditions on the high street had overshadowed efforts to reshape the business, including shutting a number of its out-of-town stores and cutting the amount of trading space at others.
"Nevertheless, we have improved margins and cash flow, significantly reduced our costs and again demonstrated the robustness of the Woolworths business," he said.
Some £37 million of costs were removed from the Woolworths main chain during 2005 due to tight cost control, the company said.
The retailer will refit 100 stores this year and an over-haul of its supply chain should lead to further cost savings but Mr Bish-Jones cautioned these would slow down.
"It's not a bottomless pit," he said.
Shares in the company fell ten per cent at the start of this year after it warned that its wholesale distribution arm could lose a contract to supply Tesco with DVDs, music and games.
The setback, which was confirmed earlier this month, is expected to lower profits at the unit by about £10 million in its next financial year.
Woolies said it was now focused on broadening the customer base of EUK, which also supplies Morrisons supermarkets and recently secured a new contract to deliver WH Smith's core DVDs.
With retailers such as House of Fraser, Kesa Electricals and HMV attracting takeover bids this year, spec-ulation is rife in the City that Woolies could also be a target.
Icelandic retail group Baugur upped its stake in the firm to ten per cent earlier this month and is seen as a potential bidder.
However, some analysts believe a takeover approach is unlikely as Woolies lacks a property portfolio, has a pension deficit of nearly £70 million and is heavily reliant on Christmas for its profits.
They also point out that no firm bids have been tabled for any of the retailers to attract interest this year.
Mr Bish-Jones said he was planning for flat like-for-like sales in 2006. Analysts expect profits to fall again this year. ..SUPL: