July 15, 2008 | posted by Michael Baxter in Corporate |

Profit warnings in the second quarter of 2008 surged to their highest level since 2001, said Ernst and Young yesterday. “Conditions,” it said, “were treacherous.”

In all, there were 98 profit warnings in the quarter. And it gets worse. “There were however at least a further 15 companies who stopped short of issuing a full profit warning stating that they would need to lower expectations if conditions did not improve,” said Ernst and Young.

Keith McGregor, Restructuring partner at Ernst & Young comments: “After a pivotal quarter, it is clear that the ripples from the credit crunch have spread far beyond the financial sphere. Most of the 26 per cent of companies warning this quarter blaming the credit crunch for their woes came from outside the financial sector.

“Moreover, mistrust and trepidation has spread; raising capital is perilous and equity markets are demanding unprecedented reassurance, especially from the leveraged and those exposed to home construction or the consumer. These are uncertain and challenging times for UK plc.”

By percentage of sector warnings, the highest warning FTSE sectors in Q2 2008 were Household Goods & Home Construction (24 per cent), General Retailers (13 per cent), and Personal Goods (11 per cent).

As for retail, food sales were strong in June, although uplift was at least partly driven by general inflationary pressures across the grocery sector. Other sectors fared less well. Clothing sales showed their biggest decline since the survey began in 1984. Sales of durable household goods and furniture and carpets were also down, confirming company intelligence that a slowing housing market and faltering consumer confidence are having a seriously detrimental impact on ‘big ticket’ purchases.

Andrew Wollaston, Restructuring partner at Ernst & Young said: “Retailers may continue to drive sales volumes throughout the summer using heavy discounting, but many retailers have already realised that the vanity of keeping top line like-for-like sales buoyant at all costs can have crippling effects on profits. Retailers will need more than good weather to compensate for consumer headwinds and their own rising costs and we expect the high level of profit warnings and business failures to continue.”