Shares in Home Retail took a dive on the FTSE 100 in morning trading after the owner of Argos and Homebase reported a drop in sales at both its chains in the full year ended 26 February 2011.

Total sales at the group's Argos stores fell 3.5 per cent to £4.2 billion, while on a like for like basis sales declined 5.6 per cent. Home Retail said that while Argos had seen good sales of laptops, tablets and white goods, the market for video games and audio products has remained weak.

At Homebase total sales dropped 1.4 per cent to £1.6 billion and like for like sales dropped 0.3 per cent. As in previous updates Home Retail said that big ticket sales had been good, but for other categories sales have been flat.

Net cash at the end of the year is estimated at £260 million, down from £414 million at the end of the same period last year.

Home Retail said that its share buyback programme, launched in April last year, had seen the purchase of 64 million shares at an average price of 233 pence per share.

Looking ahead Home Retail said it expected like for like sales in the current financial year to see a low to middle digit percentage drop. The group also said it was "planning on a more cautious basis than previously anticipated".

Terry Duddy, Chief Executive of Home Retail, said, "There are clear signs of further pressures on consumer spending, with recent trading conditions, particularly at Argos, proving to be more difficult and volatile than we anticipated. As a result, Group benchmark PBT for the year just ended is now expected to be between £250m and £255m. Against the backdrop of the challenging economic environment, and taking in to account our most recent trading, we are now planning with increased caution for the year ahead. The Group has a strong financial position and we continue to focus on driving forward our operational performances while investing further across the businesses."

Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers, commented, "Nerves for investors in the retail sector are being tested further, following today's update from Home. A lowering of current year profit expectations combined with nothing but caution for the outlook has left investors running for cover. Sales promotions are eating into the profit margin at Argos, whilst structural changes in the former growth arena of gaming - consumers are increasingly downloading video games directly - is also taking its toll.

"In all, whilst the business model at Argos continues to lend itself to the lower cost internet sales channel and Homebase benefits from homeowners' reluctance to move - preferring to renovate - management, for now, appears devoid of turnaround initiatives. Cash is leaking, with the danger now being that investors will soon begin to fret over potential cuts to the dividend payment. On balance, market consensus opinion continues to denote a sell."

By 11:15 shares in Home Retail were down 6.97 per cent on the FTSE 250 to 196.20 pence per share.