DSG blames Microsoft for £20m hit on profits

DSG, which runs Dixons, PC World and Currys, warned yesterday that disappointing sales of Microsoft's Vista operating system have cost it £20m in lost profit.

The retailer said that sales of computers running Vista, and boxed copies of the software, had failed to meet its expectations. The new software, which replaced the XP system, went on sale to UK customers in January and analysts have warned that early sales have failed to match the popularity of XP. One factor appears to be that Vista's hardware requirements mean it may not run well on older PCs.

DSG had expected consumers to upgrade their hardware to use the new operating system and the group's PC World chain ordered in tens of thousands more laptops in anticipation. But the rush never arrived and PC World was forced to slash prices to get rid of the overstocks - cutting margins by 200 basis points.

Finance director Kevin O'Byrne said: "We thought many more customers than transpired would want to change their existing hardware." He said DSG was "disappointed with the lack of promotional support" from Microsoft.

Shares in DSG fell yesterday 8.75% to 124.1p.

Mr O'Byrne said that the company hoped to make up some of its lost profits in the second half of the year, including the Christmas period, when DSG generates half its annual profits. Citigroup said it expected full-year profits forecasts to fall by £11m to £325m. The poor sales of Vista hardware meant that the computing division, which includes PC World, underperformed the rest of the company. Its like-for-like sales grew by just 1%, compared with 5% for the total group.

In the electricals division like-for-like sales in the UK and Ireland were ahead 6% - helped by strong sales of computer games consoles over the wet summer months. The Nordic countries and Greece also performed well. But the chain's UniEuro chain in Italy continues to pose problems. Underlying sales in the first half were down 8%.

Mr O'Byrne said there were encouraging signs in Italy. But he admitted the sales were "disappointing" and blamed tough competition. "We would have expected to see better performance and maybe even grown our market share," he said.

Mr O'Byrne said DSG was still facing serious deflation, meaning the retailer has to sell far more units to stand still. The price of laptops, he said, was down 15%-19% over the past year, while large flatscreen televisions had dropped in price by 30%. That prompted a 100% increase in the number of flatpanel TVs sold and a 50% increase in the number of laptops.

Mr O'Byrne said DSG could also cash in on the digital TV switchover. It saw sales of digiboxes in Whitehaven - the first town to become completely digital earlier this week - climb 300% in the last couple of weeks. TV sales also soared and the retailer's Tech Guys operation were appointed as official advisers to help the local population make the change. They will now be bidding to repeat the exercise region-by-region as the contracts come up.

Richard Hunter, head of UK equities at Hargreaves Lansdown, said the message from DSG was "again disappointing", and suggested there was little sign of its shares recovering. They have fallen 25% in the last five months.

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