Profit warnings creep up in East Anglia


26-07-2007

A survey released today by Ernst & Young has revealed that there were four profit warnings issued in East Anglia from the region’s quoted companies in the second quarter of 2007, an increase of two warnings when compared to the first quarter of the year, but unchanged from the same period in 2006.

These regional statistics are in contrast to the national picture, where in the first half of 2007, 191 profit warnings were issued by UK quoted companies, 13 per cent up on the first half of 2006, when 169 profit warnings were issued. This is the highest number of profit warnings for the first half of the year since the end of the dotcom boom.

In Q2 2007 88 profit warnings were issued by UK quoted companies, 15 per cent down from the first quarter of 2007 but an increase of five per cent from Q2 2006. A “shortfall in sales” was blamed for the profit warnings by 43 per cent of those companies involved, 22 per cent cited “difficult trading conditions” and 17 per cent gave “delayed or discontinued contracts” as their primary reason for warning.

Regionally, profit warnings from East Anglia stemmed from “adverse weather conditions”, “difficult trading conditions”, and “production and quality problems”.

Ian Best, Corporate Restructuring partner at Ernst & Young says: “We are a long way from the economic climate of the start of 2001 that saw more than 230 profit warnings in the first half of the year. Nevertheless, the 191 profit warnings issued in the first half of 2007 are a reminder that segments of UK plc are struggling.

“Expectations that interest rates will now remain elevated for some time have added weight to a plethora of warnings regarding relaxed lending policies and complex debt instruments. Many experienced market watchers are concerned that a turn in the credit cycle, brought about by these factors, together with potential shocks from the US sub-prime situation, rising interest rates and credit tightening, will result in financial turbulence.”

In East Anglia, warnings came from those companies operating in the Electronic and Electrical Equipment sector, Leisure Goods, General Retail, and the Software and Computer Services sector.

Across the UK, the highest warning sectors were Software & Computer Services with 17, Support Services with 12 and General Retail with 10 profit warnings.

The General Retail sector had double the number of warnings this quarter, compared to quarter two of 2006. The sector continues to polarise with a small proportion of companies – around 15 per cent - responsible for three-quarters of warnings in the last twelve months.

Mr Best added: “The combination of higher interest rates, rising mortgage payments and household bills has left consumers with the smallest proportion of discretionary income for five years. The decline in consumer spending is marked and has serious ramifications for retailers, especially those selling big-ticket or discretionary items.

“Recent retail sales figures from the British Retail Consortium (BRC) suggest that sales were up. However, it is likely that this is due to retailers having early clearance sales and discounting heavily, and it is unlikely that this has led to an increase in profits.”

The decline in discretionary spend has also had an effect on the Personal Goods companies which issued four profit warnings in Q2 2007, all from the much beleaguered Clothing & Accessories sub-sector. This takes the total number of profit warnings in the industry to 17 over the last twelve months. For a FTSE sector representing 26 companies, this is a considerable number.

Mr Best concluded: “Looking forward, UK plc will no longer be able to rely on the unusual combination of the last few years of fast growth, low inflation, and low interest rates. Moreover, as lenders re-assess risk, it will be harder and more expensive to borrow money. The credit environment is so different from the last downturn that it is difficult to predict the outcome, but tighter credit conditions will stretch companies and consumers. The assumption of 'risk free' lending will have to change.”

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