MFI warns bank of rising furniture business losses

MFI is expected to tell shareholders today that losses at its retail furniture business threaten to put it in breach of its banking covenants. The group has already told its lead banker, Royal Bank of Scotland, about the problem and is holding discussions about how to tackle the issue.

Overall, MFI group is still profitable because of the strength of its highly rated builders' merchant subsidiary, Howdens, but analysts are predicting the retail furniture business could post losses of £50m this year.

Last month MFI, which is reported to have medium-term bank borrowings of £85m, warned that sales at its UK stores had fallen 15% in recent weeks despite the August bank holiday promotional period. If the poor performance continues it is understood that overall profitability could fall to a level which would breach the covenants by the end of the year.

News of the latest setback comes as yet another blow to the chief executive, John Hancock, who last year had to grapple with a systems problem which badly affected the group's supply chain and saw the departure of two directors. His position is now likely to be the subject of renewed speculation.

Yesterday MFI said that it would make an announcement to shareholders today but declined to go into detail.

The problems at MFI's furniture business are the latest sign of the difficulties facing Britain's retailers.

Last week the CBI reported that sales volumes were falling at the fastest rate for more than 20 years while HMV, House of Fraser, Topps Tiles and Kesa, owner of the Comet chain, published gloomy trading statements. Earlier in September, Furnitureland announced that it was going into administration and Allsports was forced to follow suit last week.

According to the CBI, the furniture, DIY, durable goods and hardware sectors are among the worst affected by the slowdown. Yesterday the Sunday Times reported that the privately owned Focus DIY group was also in talks with its bankers over its covenants.

The lengthening tale of woe from Britain's retail sector is likely to put pressure on the Bank of England's monetary policy committee to cut interest when it meets this week. However, City economists are predicting that the MPC is likely to leave interest rates unchanged at 4.5% despite the sluggish performance of the economy and the sharp slowdown in consumer spending.