LONDON -(Dow Jones)- Home Retail Group PLC (LSE:HOME) (HOME.LN) said Thursday its expectations for its fiscal year are unchanged despite a sharp drop in comparable sales at its Homebase division in the first quarter and a decline in margins at Argos.

The U.K. home and general merchandise retailer said that while sales at its Argos catalogue retail division were in line with its expectations in the 13 weeks to March 2, sales at Homebase - its furniture and home improvement chain - were weaker than anticipated.

"While the consumer outlook remains challenging, we approach it from a position of both financial and operational strength, and at this early stage our expectations for the full year are unchanged," said Chief Executive Terry Duddy in a statement.

Sales at Homebase declined by 5% to GBP440 million in the first 13 weeks of the year, it said. Stripping out new store openings, sales dropped 12%.

The company cited poor weather conditions in March and April for the sales drop. "Seasonal-related categories account for around 40% of first quarter sales, and these experienced a like-for-like decline of approximately 20%," it said.

At Argos, the company's catalogue retail chain, sales grew 4% to GBP929 million, with same-store sales flat. Gross margin at the division declined by 125 basis points as the unit sold more lower-margin consumer electronics goods and fewer higher-margin furniture and homewares products.

Argos sells general merchandise and products for the home from more than 700 stores throughout the U.K. and Republic of Ireland, as well as online and over the telephone.

Gross margin at Homebase grew 125 basis points - driven by sourcing and supply chain savings.

The company said in April that a more difficult consumer environment would result in a negative like-for-like sales performance in both Argos and Homebase in the short term.

Home Retail, along with other house and electrical-goods retailers, as well as clothing companies are hurting due to a slowdown in consumer spending in the U.K. Negative sentiment has intensified recently, with the weakening housing market threatening to further hit spending. Home Retail's share price has more than halved in the last year, closing Wednesday at 224 pence.

Company Web site: http://www.homeretailgroup.com

-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@ dowjones.com

    (END) Dow Jones Newswires   06-12-08 0242   Copyright (c) 2008 Dow Jones & Company, Inc.