Storm warnings sound on profits
Oct 15 2007 By Graeme King, The Journal
THE number of profit warnings from the North-East’s stock market listed companies fell during the three months to September 30 – but market watchers are agreed that harder times are ahead.
The latest research from accountants Ernst & Young has revealed that profit warnings from quoted companies in the North-East and Yorkshire dropped to six from the nine recorded in the previous quarter (Q2 2007), though this did represent an increase from four in the same period last year.
On a national level, the total number of profit warnings remained steady at 86, compared with 88 in the second quarter. Multiple profit warnings were issued in the region by the ‘electronic & electrical equipment’ and ‘software & computer services’ sector.
The main reasons for issuing a profit warning were a ‘shortfall in sales’, ‘delayed or discontinued contracts’ and ‘difficult trading conditions’.
Mark Hatton, senior partner in the Newcastle office of Ernst & Young, said: “Although we have seen a brief drop in the region’s profit warnings this could well be the calm before the storm.
“The full impact of a turbulent summer in the financial markets will take time to feed through.
“We have been expecting a correction in the debt markets for some time. The world’s financial markets are still absorbing the sub prime losses in the US. It was clear that the unprecedented levels of debt, both consumer and corporate, could not continue unchecked.”
There were seven profit warnings from UK general retailers in Q3 2007, compared with 10 in the previous quarter. The sector experienced its usual dip in third quarter profit warnings; however year-to-date percentage of retail warnings is exceptionally high.
One third of the FTSE general retailers sector has warned in the last 12 months, compared with 24% in the whole of 2006. Mr Hatton added: “We are expecting consumers to be prudent in the run up to Christmas this year driven by the housing market, the higher cost of debt and concerns over unemployment, as some major financial institutions in London begin to downsize following losses in quarter three.
“Retailers must develop strategies to cope with a slowdown in consumer spending. An unwavering focus on customer service, tight control of inventory and product availability across all channels, and a focus on margins with a strategic approach to pricing will be crucial to success.
“With the prospect of companies having reduced options to re-finance, plus public sector demand restrictions and more of the household budget going towards mortgage repayments, there is the real prospect of business just becoming a little tougher in 2008.”
