MFI FURNITURE paved the way for a break-up of the group yesterday by outlining plans for the “legal and commercial” separation of its three divisions.

In the second phase of a wide-ranging “strategic review”, Britain’s biggest furniture retailer also said it would shed nearly 1,500 jobs as it moves to cut costs by closing stores, factories and delivery depots.

MFI said that the restructuring would involve splitting the group into retail, which comprises the MFI-branded outlets; Howdens, which supplies trade buyers; and supply, which contains the group’s manufacturing and outsourcing arms.

Matthew Ingle, who took over as chief executive last October after a series of profit warnings resulted in the departure of John Hancock, yesterday refused to rule out an eventual demerger of the group. Describing MFI in its present state as a “verticalised, amorphous mass”, Mr Ingle said that a complete division of the parts “could be a conclusion”.

In a move to compete with rivals that have outsourced production to low-cost countries, the company said that its supply division would source more products from abroad in a gradual shift away from in-house manufacturing.

By the end of 2007, MFI intends to source 75 per cent of its goods from overseas, compared with 50 per cent currently. Manufacturing capacity in the UK will be cut by 40 per cent, with the closure of two factories, at Scunthorpe and Stockton-on-Tees, resulting in the loss of 1,100 jobs.

Mr Ingle said that 75 per cent was “not a ceiling”, but added that the group would always want to retain some manufacturing capability.

MFI said that there would be potentially a further 95 job cuts at 11 retail outlets that it has earmarked for closure. It added that under its continuing store portfolio assessment it was considering the closure of a further 15 outlets, putting a total of 370 jobs at risk. The retailer said that it would also shut three of its eight home-delivery depots, describing the present system as “inflexible” and “inefficient”.

The announcements came as MFI reported an increase of more than 6 per cent in like-for-like sales at the Howden division for the period between the start of its winter sale on Boxing Day and February 22. The 342-outlet division, which saw its gross margin at 100 basis points in the period, will be expanded by 30 outlets a year.

At the retail chain, orders in the same period were down 17 per cent, or 14 per cent on a like-for-like basis. However, the company increased the margin by 500 basis points after focusing on its kitchen and bedroom ranges and repositioning itself as a mid-market retailer with kitchen ranges retailing from between £500 and £1,200.

The company also said that it was looking to sell its 29-store Sofa Workshop unit.

Shares in MFI gained 9 per cent to 97¾p before closing at 92p, after investors expressed relief that a £600,000 loss for the year to December 24 was not as bad as expected. It compares with a profit last time of £54.5 million. Including exceptional costs, the company reported a loss of £110.8 million.

Operating profit at Howden showed a marginal increase on the previous year at £103.6 million against £102.8 million, while the operating loss at the retail chain widened to £85.1 million from £31.3 million previously. Group turnover in the period was up 2.5 per cent to £1.55 billion. There is no final dividend.

MFI yesterday also revealed John Hancock had received a total payment of £533,000 since his departure in October. He also walks away with options worth £821,100 at last night’s closing price.

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