The East Yorkshire-based firm said plummeting consumer confidence during the summer hit demand for caravans and motorhomes.

Fewer purchases mean the group is holding much more stock, and Discover said debt has almost doubled to £22m from £11.2m last year.

Discover, which employs about 640 people across the UK, said it intends to cut numbers to below 600, including some redundancies at its York branch and North Newbald head office.

Shares yesterday fell almost 39 per cent to close at 2.38p.

In a trading update yesterday Discover said pre-tax profit is expected to be "materially below current market expectations".

Finance director Neil Harwood said: "People might have the money but their confidence is really not there. People are just holding onto the product they have got.

"We believe the fundamentals are very much right in this industry – it's just unfortunate that the current market conditions are probably the worst many people have seen."

Discover has embarked on an ambitious acquisition strategy in recent years, buying Leisure World for £5.75m in September 2006 and Barrons Holdings and Mendip Caravan Centre for £20m and £2.2m respectively last July. In March it also paid £2.66m for Brownhills Group's motor homes dealership.

Mr Harwood said there may be scope for more acquisitions, as other smaller dealers struggle. "They will certainly be much cheaper," he said.

Mr Harwood said Discover is closing its Cardiff branch with the loss of about 15 jobs, as well as making a "small handful" of redundancies at each of the 15 remaining branches. However, he said the impact would be "relatively minimal" in Yorkshire.

Discover will be "massively" scaling back purchases of new motorhomes and caravans, as it tries to offload the stock hangover, he added. Sales volumes are down "significantly", he added.

In December last year, City forecasts had been for Discover to make a pre-tax profit of £3m this year, after it reported a £670,000 loss for the year to August 31, 2007. At the time it said fears over terrorism, the popularity of the British holiday and an ageing population meant a positive outlook for the group.

In May Discover said poor weather drove it to a pre-tax interim loss of £1.8m, rising from £788,000 last year. At the time it said delivering market expectations would be a challenge in the economic climate, but insisted it was confident for the future.

In yesterday's statement Discover said: "Consumer confidence fell further in the summer period and led to a reduced demand across the UK leisure vehicle market.

"Whilst the company has been profitable throughout the second half year, lower than expected volumes and higher interest charges mean that headline profit before tax is anticipated to be materially below current market expectations."

Discover is due to report full-year results on December 1. It said revenue for the year, which runs from September 1 to August 31, was about £138m, reflecting the acquisitions. Last year it reported turnover of £54m.

The group said it is taking action to reduce costs, increase market share and optimise working capital. It launched a motorhome rental arm in July "to cater for changed customer budgets". It said this has so far had more than 500 inquiries and made 78 rentals in the first two months.

It said in June and July it grew its share of the motorhome market to more than seven per cent from less than one per cent a year ago. Online motorhome sales launched in May have grown strongly to achieve turnover of £205,000 in July and August, it added.

House broker Panmure Gordon revised its pre-tax profit forecast to £500,000.


An industry suffers

The caravan industry has been hit hard by falling consumer sentiment.

Customers, who tend to be older with more disposable income, have been holding back from buying 'big ticket' items.

Latest available figures from the European Caravan Federation for March show a 31 per cent slump in UK new caravan registrations. They were down to 2,369 from 3,460 a year earlier. The UK is the biggest European buyer of new caravans, followed by Germany and the Netherlands, and is not alone in experiencing the slump in activity. Across Europe in March total registrations fell by 19.3 per cent to 11,358.

Figures for the summer are likely to show an even bigger slump in new registrations.

Falling sales pose serious concerns for East Yorkshire's caravan, mortorhome and holiday home industry, which employs thousands and includes manufacturers Swift, Abbey, Coachman and ABI.