2nd UPDATE: DSG International Posts Encouraging Sales Trends, Outlook

DSG International PLC (DSGI.LN), Europe's second-biggest electrical retailer by sales, sounded a note of optimism Wednesday, pointing to an improving sales trend in its fiscal first quarter as evidence of a shorter consumer downturn than originally feared.

Chief Executive John Browett said that while trading across Europe remains difficult, "the outlook now looks less negative than it did in the spring."

While Europe was clearly still in an economic downturn - demonstrated by a 6% year-on-year sales decline for the group - month-on-month the picture looked far more rosy, with sales levels rising in each month of the summer, Browett said. This was partly due to a store-revamp program but also due to an improving economic climate, he added.

"It's not going to be quite as bad as some of the more pessimistic scenarios had suggested," the CEO said.

Electronics retailers have been among the worst hit by the downturn as householders take longer to replace white goods and PC's and cut back spending on other electronic items like cameras and music players. Browett's comments suggest the worst for the sector may now be over.

The comments came as the owner of the Curry's and PC World reported a 6% drop in sales for the 16 weeks to Aug. 22. This compares with a 9% drop in the year to May. Analysts had feared a sales fall of more than 10%.

Browett said the group's sales performance had beaten expectations despite DSG's focus on margins and costs rather than top-line growth. Gross margins across the group grew 0.7%.

The stronger-than-expected sales and upbeat outlook drove the share almost 10% higher in morning trade, though by 0945 GMT, they had lost their initial gains and were trading flat at 27 pence.

DSG has suffered more than some of its rivals due to exposure to the weak U.K. market, with Metro AG's (MEO.XE) Media Markt posting a 2.9% rise in first-half sales recently, boosted by a 5.8% rise in Germany. The German retailer's success was partly attributed to a store revamp program. Store revamps are also seen as key to DSG's long-term prospects when Europe emerges from recession. The U.K.'s number-one electricals chain is in the process of refitting its U.K. stores in anticipation of increased competition when U.S. giant Best Buy Co. Inc. (BBY) launches big store formats in the U.K. next year.

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The Best Buy launch was originally planned for this summer, but was delayed due to the economic downturn.

Browett said that all of DSG's revamped stores had continued to deliver a profit performance between 11% and 65% better than older-format stores.

So far 108 of its 519 U.K. stores have been converted to one of its four new formats, with a further 60-80 stores to be refitted by the year end. The revamped stores have a larger range of products, with demonstration and interactive areas. The initiative has started to deliver higher sales and profit margins at the converted stores.

Pali International analyst Nick Bubb said the stronger-than-expected sales performance owed a lot to a 9% sales rise in the Nordic region - which offset the poor performance in the U.K, where sales were 14% down. A huge lift from the U.K. store refits will be needed if real shareholder value is to be delivered, he said.

DSG also said Wednesday it has agreed to sell its eight Polish Electro World stores to IDMSA Brokerage House, working with Mix Electronics S.A - a rival electrical retailer in Poland - for a nominal consideration of EUR1.

Browett said the Polish sale marked the last of DSG's major disposals.

-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; [e-mail]