Home Retail Group sent a shudder through the stock market yesterday by revealing the worst sales drop at Argos for nearly a decade alongside plans to write down the value of Homebase, its DIY chain, by about £700 million.

In the latest update from the high street, Home Retail said there had been a marked downturn in demand over the past three months as customers deal with the credit crunch.

Terry Duddy, chief executive, said there was every chance of one or two corporate collapses in retail in 2009 given the tougher economic climate. “Consumers are shopping less, they’re not spending less when they come in, but footfall is down,” he said.

Sales at Argos fell by 5.8 per cent in the three months to August 30, its worst quarterly performance since 1999, as sales of furniture dropped by up to 20 per cent.

Homebase suffered an 8.3 per cent dip over the same three-month period.

Mr Duddy said that Home Retail would have no choice but to cut the carrying value of Homebase at its half-year results next month given the slim chance of a significant recovery at the business over the next two years.

He conceded that the writedown was likely to see Homebase’s book value fall from nearly £1 billion to about £300 million.

Shares in Home Retail fell by more than 5 per cent to 228¾p and the trading update dragged down shares in most of its rivals. Kingfisher, owner of B&Q, fell nearly 6 per cent while DSG International, home to Currys and PC World, dropped 9 per cent.

One analyst said: “Home Retail’s figures are pretty poor and people are reading across for what it might mean to other companies. Argos was worse than expected and while the write-off at Homebase is no great surprise it reminds people how far that business has fallen.”

Mr Duddy acquired Homebase for £900 million in 2002 when Home Retail Group was part of GUS. At the time it was viewed as a relatively expensive deal given that Permira, the private equity group, had bought Homebase only 18 months earlier from J Sainsbury for £750 million.

Homebase was generating annual profits of more than £100 million six years ago. This year it is expected to make between £25 million and £30 million.

Mr Duddy said: “We had to pay what we had to in order to get Homebase at the time. If I’d have known then that there would be two big downturns taking place in the next three or four years, that would have affected my valuation of the business.”

Mr Duddy insisted that despite the weaker sales, a series of cost-saving measures had protected margins and that Home Retail was still on course to hit full-year profit targets. “We have ended the second quarter at the place where we thought we would be. We saw big demand in the first quarter, swinging to lower demand in the second,” he said. “We believe we are still going to hit our expectations and we are going to have a load of cash.”

However, analysts said downgrades were almost certain. Investec indicated that it was likely to bring its forecast for Home Retail’s full-year profits down from £362 million to £340 million.

John Stevenson, analyst at Shore Capital, said there were also growing concerns about forecasts for 2010 given inflationary pressure coming into the nonfood sector.

Numbers crunched

18,000 products offered by Argos

1,800 pages in Argos catalogue

700 Argos stores

130 million customers a year at Argos stores

70 million customers a year at Homebase stores

Source: Home Retail Group

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