Market Report: DSG hits 27-year low on Citi downgrade

DSG International slumped to its lowest level since the early Eighties last night after its house broker Citigroup, reiterating its "sell" rating, slashed its earnings forecasts for the troubled retail group.

Citi said that, as one of the most operationally and financially leveraged businesses under its coverage, DSG "is very materially impacted by the current cyclical slowdown/recession".

"In addition, the business continues to suffer from the structural over-capacity and deflationary trends that have crushed [margins on earnings before interest and tax] over the past 10 years," the broker said, downgrading its 2010 earnings per share estimate by 19 per cent and arguing that the risk of a further deterioration in earnings was likely to continue to weigh on the group's already depressed share price.

The assessment followed news last week that Atradius, one of the biggest credit insurers in the UK, had scaled back its cover for suppliers to the group, rattling investors and sending the stock to a session low of 9.72p. At close, DSG was down 31.25 per cent, or 5p, at 11p, its lowest level since 1981.

Elsewhere in the retail sector, Marks & Spencer lost 5.33 per cent, or 11.25p, to 200p following reports that it was set to hold a one-day sale later this week in a bid to stimulate flagging consumer demand. Seymour Pierce, which last night moved its 2009 pre-tax profit forecast to £630m from £650m, said the move was a "clear sign that sales are well behind budget in the lead-up to Christmas". Cazenove also weighed in on the retailer, reducing its 2009 pre-tax profit forecast to £625n to reflect "mounting evidence of deteriorating demand conditions since the end of September".

The wider sector was also unsettled with Debenhams losing 15.93 per cent, or 4.5p, to 23.75p and Sports Direct International falling to 32.25p, down 12.84 per cent, or 4.75p.

Overall, the FTSE 100 ended perilously close to the psychologically important 4000-point mark, closing down 202.87 points at 4005.68. The mid-cap FTSE 250 was also down, losing 219.4 points to 5706.58 after another round of grim economic news drove investors out of equities.

In the UK, minutes from the Bank of England's interest rates meeting earlier this month revealed that the central bank considered cutting its base rate by as much a 2 per cent amid concern about tighter credit conditions and a drop-off in domestic demand while the latest CBI Industrial Trends survey suggested that manufacturers were anticipating the sharpest economic contraction in 30 years. Investors were also spooked by data from the Labour Department in the US, which revealed that cost of living in America was down 1 per cent last month as prices respond to falling demand from consumers.

On the FTSE 100, the mining sector proved to be the biggest drag after metals prices eased on the weak demand outlook. Kazakhmys was the hardest hit, losing 17.87 per cent, or 42p, to 193p. Vedanta Resources fell to 438p, down 14.87 per cent ,or 76.5p, and Lonmin lost 13.03 per cent, or 108.5p, to 724.5p.

Among financials, the picture was mixed. HBOS gained 2.06 per cent, or 1.3p, to 64.3p after LloydsTSB shareholders backed a proposal to merge the two lenders. Lloyds, on the other hand, lost 9.68 per cent, or 12.7p, to 188.5p. Barclays was also weak, losing 13.31 per cent, or 19.9p, to 129.6p amid signs that its £7bn capital raising was on track despite concerns that it may erode shareholder value.

On the second tier, Mecom, the European media group, was the strongest, gaining more than 31.3 per cent, or 0.36p, to 1.51p, following rumours that Axel Springer, the German publisher behind Die Welt and Bild, was preparing to make an offer. Traders remained sceptical, however, suggesting that, if Axel does make an approach, it would focus on the group's Polish assets. "There is little logic to the argument that it wants to buy the whole thing," said one market source.

On the downside, Enterprise Inns dropped 23.81 per cent, or 20p, to 64p after Dresdner Kleinwort reduced its target price for the stock to 210p from 320p. JP Morgan also slashed its target, to 170p from 365p, recommending a dividend cut and saying: "We think questions are going to remain around Enterprise's debt financing for the foreseeable future and it is hard to see the stock performing until these issues are resolved."

JP added: "We think that the best way to restore shareholder value would be to cut future dividend payments and accelerate debt repayments with a view to taking the group out of the distress category."

Among smaller companies, Woolworths lost 38.32 per cent, or 1.46p, to 2.35p following news that it was in talks to sell its retail business to Hilco, the restructuring specialist.