LONDON (AFX) - Kingfisher PLC, Europe's largest home improvement retailer, has blamed the 'very weak' UK market and intense price competition for falling fourth quarter sales and margin erosion at its B&Q do-it-yourself chain and warned investors not to expect trading to pick-up in the short term.

With the group also revealing a weaker-than-expected performance from its Brico Depot business in France, its shares were marked down 2 pct.

'Conditions [in the UK] haven't changed much over the last few months [and] there really isn't any reason why they should,' he told AFX News.

For the three months to end-January 2006 like-for-like sales at the 335-strong B&Q chain fell 9.0 pct -- in-line with analysts' consensus forecast but a slight deterioration from a drop of 8.4 pct in the third quarter.

The sales slump continued despite a series of discount days and promotions designed to pull in the punters.

The price reductions meant B&Q's gross margin fell in the quarter -- analysts estimated it down a worse-than-expected 350-400 basis points, having fallen 200 basis points in the third quarter. Kingfisher flagged it would be down 200 basis points for the full year.

However, Murphy said B&Q still made a profit in the fourth quarter, outperformed the UK DIY market as a whole, winning kitchen share from rivals such as MFI Furniture Group PLC, and noted 'underlying' like-for-like sales were down a more modest 6 pct before adjusting for sales of kitchens and bathrooms which will be delivered in the 2006/07 financial year.

The UK DIY market has deteriorated significantly since last summer with consumers feeling the pinch from escalating energy costs, higher taxes and pension contributions, rising debt burdens and a weak housing market.

B&Q's total sales fell 6.1 pct to 850.3 mln stg. All product categories were weak, although trade-related sales remained relatively resilient.

'B&Q's new management team (led by CEO Ian Cheshire) has acted decisively to support short-term trading, manage stocks and reduce costs at the same time as accelerating the development of B&Q's stores, ranges and services for the future,' said Murphy.

He also identified a ray of light in recent mortgage approval data for the UK -- approvals accelerated in December to reach levels not seen since mid-2004 when house prices were rising rapidly.

'If that translates in the spring into a more stable housing market and better consumer confidence then I think you might see the benefit of that later in the year,' he said.

Kingfisher's overall group retail sales in the fourth quarter were up 5.6 pct to 1.86 bln stg, but were down 0.5 pct on a like-for-like basis.

Within this like-for-like sales at the 64-outlet Brico Depot chain in France disappointed -- they were up 2.6 pct, significantly below analysts' consensus hopes of a 5.8 pct rise.

The 101-store Castorama chain in France saw like-for-likes increase 2.4 pct. Rest of Europe like-for-likes increased 18.8 pct, while Asia was up 8.2 pct.

Prior to a profit warning last April, the market was forecasting a year to end-Jan 2006 underlying pretax profit of about 690 mln stg. However, their estimates have been repeatedly slashed to a consensus of 440 mln stg going into today. Kingfisher said it would meet these revised hopes.

It also said its year end net debt is expected to be under 1.4 bln stg, better than analysts had feared.

At 9.33 am shares in Kingfisher were down 4-3/4 pence at 223, valuing the business at 5.25 bln stg. This time last year the shares were changing hands for about 290 pence.

Kingfisher's house broker, Credit Suisse, reiterated its 'neutral' rating and stuck with its bottom-of-the-range underlying pretax profit forecast of 410 mln stg for the year to end-Jan 2007.

The broker is worried about further margin erosion at B&Q.

'Even allowing for a lower level of promotional activity than seen since the autumn at B&Q, its annualisation and the longer term nature of some strategic price realignment at B&Q suggest that gross margin impacts of a further 100 basis points might be anticipated in 2006/07,' it told clients.

In the past the stock has been buoyed by speculation of a possible bid from US DIY giants Home Depot Inc or Lowes Cos Inc or private equity players.

The group will announce full year results on March 21.

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