British takeover target Home Retail reported a bigger then expected 2.2% drop in like-for-like sales at its biggest chain Argos.
This comes hours after its said it was in talks to sell its Homebase chain for £340m to an Australian company.
Home Retail, which supermarket group Sainsbury's wants to buy, said Argos suffered a 13% reduction in traditional walk-in sales in December. A 10% increase in digital sales was not enough to compensate.
Analysts had expected like-for-like sales at Argos to rise by 0.3% in the 18 weeks to January 2.
Home Retail said its benchmark profit before tax for the financial year ending February would be around the bottom of analysts' expectations, which range from £92-118m.
Like-for-like sales at its Homebase DIY stores rose 5%, just short of analysts' average forecast.
The company said last night it was close to selling Homebase to Australia's Wesfarmers.
Sainsbury's wants Home Retail's Argos to extend its general merchandise ranges and benefit from its investments in online and mobile, home delivery and click and collect services.
Home Retail rejected an approach from Sainsbury's in November, and the supermarket group has until February 2 under UK takeover rules to try again or to walk away.
Sainsbury's said today that the tie-up, which is focused only on Argos, was strategically compelling, but it would not over-pay for the deal.
Media reports say it offered about £1.1 billion but some Home Retail investors want £1.6 billion or 200 pence a share.