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Low hopes cut profit warnings
LOW expectations from Britain’s listed companies meant the number of profit warnings on the stock exchange dropped significantly in the third quarter of the year.
Data released today by accountancy firm Ernst & Young shows UK quoted companies issued 51 profit warnings in the three months to the end of September, 28 per cent fewer than during the previous quarter.
But Colin Dempster, restructuring partner at Ernst & Young in Scotland, said diminished expectations, rather than economic improvement, was behind much of the fall.
“Undoubtedly, part of the drop is due to limited growth in the UK economy which, when combined with operational efficiencies, is helping companies to meet profit expectations,” he said. “However, it is also true that these profit expectations have been scaled back significantly over the summer, hit by escalating fears of a double dip.”
Despite the overall drop in warnings, the data showed how the squeeze on consumer incomes, and consequent decline in spending, was impacting some sectors in particular. Retailers and construction firms were among those most likely to have warned about disappointing profits.
Quoted retailers have issued more profit warnings in the first nine months of 2011 than in the whole of 2010 and 2009 combined.
Dempster said some retailers would be relying on the Christmas boost to keep them going.
He said: “As we move into the vital final quarter, profit will come second to cash flow concerns for those retailers who have already dug deep into their reserves to put stock on the shelves and pay the rent.
“Some are clearly running on empty and desperately need tills to start ringing quickly.”
There are also signs that the decline in orders following the credit crunch is catching up with builders.
Construction & materials was the FTSE sector with the highest proportion of companies warning this quarter, at 15 per cent. That means nearly a quarter of all listed firms in the sector have already issued profit warnings this year.
Dempster said the long orders pipeline delayed the impact of the slowdown and austerity in the sector, but the pain was now being felt, especially among the smaller operators, which have less of a buffer against contract loss.
Worries over the global economic outlook mean many quoted British companies have been cautious in their recent outlook statements pricing in a tough 2011 and an austerity Christmas.
Dempster said that means even a flat final quarter could result in a only a modest year-on-year rise in profit warnings.
But events could easily overtake forecasts, he said, especially for those heavily exposed to the beleaguered peripheral economies of the Eurozone and those serving the consumer.
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