Home Retail Group recorded flat first-quarter like-for-like sales at its flagship Argos chain – ahead of expectations – but warned that the outlook remains challenging.

Stronger-than-forecast like-for-likes at Argos in the 13 weeks to May 31 were driven by “quite exceptional” demand for electrical and gaming products, said the retailer.

However, the sales result were at the cost of gross margin, which fell 125 basis points, reflecting the relative weakness of higher-margin seasonal ranges, furniture and homewares. Total sales at Argos were up 4 per cent to£929 million.

The trend was reversed at Homebase, where like-for-like sales slumped 12 per cent, partly because of poor weather. Gross margins were up 125 basis points, driven by sourcing and supply chain improvements. Sales of seasonal items fell 20 per cent on a 5 per cent decline in overall sales to£440 million.

Home Retail finance director Richard Ashton said demand at Argos was “quite exceptional” for video games, consoles and related accessories, including Nintendo Wii Fit, Nintendo DS and Grand Theft Auto IV.

However, he warned that, unless the demand for these categories continues, there will be a rebalancing in expectations and would be surprised if the sales momentum remains.

Ashton added that pre-tax profit forecasts for the full year remain in line with expectations of£379 million.

Following the announcement, Home Retail’s shares tumbled in a week of stock market turmoil for store groups.

Chief executive Terry Duddy urged investors not to get caught up in negative sentiment about the declining sales pattern and focus on the retailer’s underlying strength.

Seymour Pierce analyst Freddie George said Argos is a “relatively defensive business in troubled times”. He noted that Homebase’s performance was “disappointing relative to B&Q” and that “management should now consider changes and reassess strategy”.

Citi analyst Ben Spruntulis said: “Given the UK consumer has not yet fully capitulated, we fear for weaker trends as we progress through the year and into 2009.”