BusinessCorporate FinanceRise in profit warnings blamed on poor sales

Rise in profit warnings blamed on poor sales

Report by Ernst & Young shows low sales and natural disasters lead to rapid rise in profit warnings and a slew of insolvencies 

Profit warnings rose nearly 25% in 2005 compared with the previous 12 months,
Ernst & Young has reported.

Almost half of the highest rise since 2001 was blamed on lower sales, with
difficult trading conditions and increasing costs and overheads – and natural
disasters – also given as factors.

Profit warnings averaged 95 per quarter compared with 65 in 2004, the audit
firm’s research found.

In the final quarter of 2005, the highest number of warnings were in the
support services sector, with 16 warnings, six of which came from recruitment
companies.

However, general retailers were also in trouble with nine warnings adding to
the woes of Allders, Allsports, Furnitureland, Kookai and Unwins, which all went
into administration in 2005. All up, it was a tough year for retailers, with 35
profit warnings that accounted for 12% of the sector.

The engineering, insurance, and software and computer services sectors also
had seven warnings each.

Indeed, the insurance sector had its worst year on record, both in terms of
claims and warnings, thanks to a record number of natural disasters including
hurricanes Katrina, Rita and Wilma. This led to 15 profit warnings being issued
during the year – seven during the last quarter – which compares with only eight
warnings issued in the whole of 2004.

Keith McGregor, corporate restructuring partner at Ernst & Young said the
conditions on the high street were likely to remain difficult this year: ‘The
first quarter of 2006 is likely to see a similar warnings picture, possibly with
a heavier bias toward retailers, in particular, the higher-end, clothing and
electrical suppliers.

‘With rents and employee costs on the rise and no opportunity to increase
prices, all retailers will be looking to manage out costs and increase volumes.’

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