You are here: City and Corporate / Credit crunch continues to bite business
Credit crunch continues to bite business
Archived article dated Monday April 14th 2008
Profit warnings top 100 for second consecutive quarter.
Research released by Ernst & Young today reveals that UK plc saw no respite in the first quarter of 2008 as profit warnings reached 114; the highest first quarter figure since 2001 and up 11 per cent from Q1 2007.Keith McGregor, Restructuring partner at Ernst & Young comments: “Profit warnings remained above the 100 mark for the second quarter in a row, driven by the deepening impact of the credit crunch and a record number of retail warnings. The last time UK plc issued more than 100 profit warnings in consecutive quarters it was 2001, when the end of the technology-led boom meant painful readjustment. The hangover from the credit-boom could be equally severe especially as some sectors are warning on current poor trading but may have failed to factor in the impact of a sustained downturn in demand.”
The highest warning sectors were General Retailers with 18, equalling their record peak of Q1 2007, Support Services with 14, Software & Computer Services with 13 and Media and General Financial with eight.
The General Retail sector has 18 warnings this quarter equalling the record number that were recorded in Q1 2007. Retail profit warnings usually peak in the first quarter, when retailers provide Christmas and January sale post-mortems. However, it is clear this year that the sector is in more distress than at the start of 2007. The 12 months to the end of March 2007 saw 26 per cent of the sector issuing a warning. By comparison a remarkable 42 per cent of FTSE General Retailers had issued a warning to the year to date ending March 2008.
Andrew Wollaston, Restructuring partner at Ernst & Young comments: “It would be reasonable to expect more of the same, if not worst, for the rest of 2008. Yet, retail sales showed resilience in February and March. However, looking behind the figures it is evident that food and seasonal items drove most of the sales growth. Other sectors such as household goods saw a decline highlighting that consumers are cutting back their spending on big ticket purchases and is evidence that the pressure is beginning to build.
“The credit crunch will become real and personal to borrowers this year, especially the two million mortgage holders coming off fix-rate deals. The base rate is expected to continue to fall gradually in 2008, but the same inflationary pressures that will limit the ability of the Bank of England to lower rates, will also eat into the benefit of any rate cut for the consumer. The period of economic uncertainty may even persuade individuals to increase savings from their historic lows, leaving retailers with even less of the disposable income pie.”
There have already been ten notable retail administrations in this quarter and the outlook looks bleak for the second quarter and beyond. The early Easter and far chillier Spring than we enjoyed in 2007 will hit like-for-like figures. Retailers will need more than good weather to compensate for consumer frailty and their own rising costs.
Tagged as: ernst and young
Share this article:
Should your colleagues be reading the Retail Bulletin?
Let them know about us.
