Profit warnings at highest level since 2001

Profit warnings issued by UK-listed firms are at a 5-year high since the low point of the technology-led stock market crash in 2001. Research by Ernst & Young, the accountancy firm, has established that in the first 6 months of 2007, 191 companies cut earnings forecasts, 13% more than in the same period in 2006.

The main reason quoted for the warnings was a deficit in sales, indicating a downturn in the UK economy. Software and support services firms issued the most earnings downgrades.

At the start of 2001, more than 230 profit warnings were issued and this was at a time when the UK stock market had almost halved in value since its peak in the last days of the dotcom boom. Ernst & Young commented that we are a long way from the economic climate of that era. However, rising interest rates and expensive borrowing costs are a reminder that sections of UK plc are struggling.

Software firms were worst affected with 14 out of 171 cutting earnings expectations. Second were support services where a fifth have reduced earnings expectations for the year over the last 12 months.

Retailers are also under pressure, Ernst & Young remarked that the fall in consumer spending is marked and has serious implications for retailers, especially those selling big-ticket or discretionary items.

Retailers issuing profit warnings include Fopp, the music retailer, and grocery store Kwik Save. High street giants such as Tesco and Marks & Spencer have recently announced tougher trading conditions.

The clothes industry was also affected by consumers limiting their spending, with more than half the companies quoted on the London Stock Exchange issuing profit warnings in the last year - 4 in the second quarter of 2007. Ernst & Young believe the reasons to be low-cost imports and increasing overheads that are impossible to pass on to shoppers in a highly competitive trading environment.

Ernst & Young warned that tighter credit conditions will stretch companies and consumers. The assumption of ‘risk-free’ lending will have to change.

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