Number of profit warnings steady but worse to come

THE number of profit warnings across Yorkshire remained relatively static in the first quarter of 2011 but experts warn that there is more pain to come.

Quoted companies in the region only issued five profit warnings, one up from the four announced in the final quarter of 2010 and the same number that were issued for the first three months of 2010.

Nationally, there were 75 profit warnings in the first three months of 2011, which is nearly 50 per cent more than the last three months of 2010 and a near 40 per cent increase with the same quarter in 2010, according to Ernst & Young’s latest Profit Warnings report.

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The Yorkshire profit warnings were spread across a number of sectors: Media, industrial engineering, support services, technology, hardware and equipment and pharmaceutical & biotechnology.

The main reason for the profit warnings in Q1 2011 was cost pressures with 25 per cent of the profit warnings being due to increasing costs and pricing pressures, highlighting the increasing burden that businesses will face over the next quarter as a result of spiralling commodity prices.

Hunter Kelly, restructuring partner at Ernst & Young, said: “Although a third of companies cited last December’s cold snap as a significant factor affecting their trading performance, this was only a contributing, rather than the lead factor, in many of these profit warnings. By the end of the quarter, squeezed consumer spending and rising commodity price concerns had moved to the fore.”

Rising inflation ranks highly among current challenges facing companies, consumers and policy makers alike. The worry of increased interest rates and job fears is placing unwelcome additional strain on company, consumer and public spending.

Mr Kelly said: “Overall, the UK’s recovery looks just about strong enough to withstand these tests, but growth in many sections of the economy will remain subdued and consumer-facing and public sector servicing companies in particular will find 2011 much tougher going than 2010.”

For the first quarter of 2011 it was the erosion of households’ disposal income that bit the high street in earnest. The 14 profit warnings issued by FTSE General Retailers in Q1 2011 was the third highest recorded. However, there was increased activity in the construction and contracting sector.

Mr Hunter added: “Although Yorkshire is faring better, the sharp rise in profit warnings at the start of 2011 across the UK as a whole confirms the belief that the year ahead will be considerably more testing than 2010.

“There is a risk that price and demand volatility in 2011 will catch companies out. Profit warnings normally peak in the first and final quarters and so may fall next quarter; but the expectation is that the number of profit warnings for 2011 as a whole will exceed significantly 2010.”