Margins fears shake Matalan

SHARES in rumoured takeover target Matalan were hit today as a trading statement from the struggling discount retailer spooked the City.

Like-for-like sales rose 4.1% in the 18 weeks to 3 July but investors were worried by a fall in the gross margin and an 8% tumble in the group's average selling price.

The shares fell 6 3/4p to 204 1/2p despite chief executive John King's insistence that the recovery drive was on track.

King also announced plans to refurbish 130 older stores at a cost of £25m. Gillian Hilditch, an analyst at Arbuthnot Securities, said the underlying sales picture looked good only because of weak comparatives with a year ago when like-for-like sales dropped by 6.6%.

'This was not an impressive performance,' she said. 'I think there should be significantly more concerns that their average selling prices are down this much.'

Matalan's self-styled position as the lowest-priced clothing retailer on the block has been threatened by the aggressive expansion of supermarkets Asda and Tesco.

King said that the underlying sales growth showed customers were reacting to better promotions. He put a 0.2% drop in margins down to the clearance of low-selling menswear ranges.

He conceded a successful autumn and winter season was crucial. 'We still have much to do,' he said.