UPDATE 3-UK's DFS Furniture lowers annual profit forecast as orders slip

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FY profit forecast lowered to 30 mln STG - 35 mln STG

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Market share of 38%, up 2% from FY

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Shares down about 4%

(Adds details on market share, comments on costs and margins, analyst comment, background on peers)

March 16 (Reuters) - British furniture retailer DFS lowered its annual profit forecast on Thursday as orders for its made-to-order sofas and arm chairs slipped in recent weeks as customers spend less on discretionary items amid a cost of living crisis.

Inflation still remains high in Britain, forcing consumers to tighten their belts, while businesses face rising costs, including on energy bills.

Despite the lowered forecast, DFS said its cost headwinds are abating and it expects profit margins to improve in the second half of the year.

"Cost headwinds are reducing and, in some cases, reversing and we expect our upward gross margin trajectory to continue as we execute our margin build back plan," Chief Executive Tim Stacey said.

The company now expects profit before tax for the year to be between 30 million pounds and 35 million pounds( $36 million-$42 million), towards the lower end of its earlier forecast.

Shares of DFS were down about 4% to 128 pence at 0920 GMT.

"This was never likely to be a moment when forecasts rose, as there are still pressures on cost ratios and it is impossible to call the consumer," analysts at Peel Hunt said.

However, the company continued to win market share in the upholstery sector, helped by strong order intake during the winter sale season.

It currently holds a 38% market share in the UK, up 2% from its 2022 levels.

Britain's Dunelm, which sells a wider range of home furnishing products than DFS, continues to perform better than its peers but warned that the consumer outlook remains unpredictable.

Retailer John Lewis said it would not pay its staff a bonus after inflation and the cost of living crisis widened its losses.

While last month, U.S.-based Home Depot Inc warned of slowing demand for home improvement goods as customers reduced spending on remodelling projects.

DFS said its underlying profit before tax fell to 7.1 million pounds in the six months ended Dec. 25, from 23.3 million pounds a year ago.

($1 = 0.8271 pounds) (Reporting by Radhika Anilkumar in Bengaluru; Editing by Savio D'Souza, Emelia Sithole-Matarise and Sharon Singleton)