Bloomberg News

Retailers Face ‘Biggest Test’ Since 2008 as Profit Warnings Rise

October 08, 2011

Oct. 9 (Bloomberg) -- U.K. retailers issued more profit warnings in the first nine months of the year than in the last two years combined, facing their biggest test since 2008, Ernst & Young LLP said.

Retailers have to keep a “tight rein” on stock and cash levels on approaching Christmas and December-quarter rent day, the accounting firm said.

“Some are clearly running on empty and desperately need tills to start ringing,” Alan Hudson, head of U.K. restructuring at Ernst & Young, said in the statement, “Retail insolvency usually peaks in January, but there is a danger that we might see further retailers fail in the final months of 2011 as they run out of cash.”

Tesco Plc, Britain’s largest supermarket chain, last week reported a decline in second-quarter sales in stores open more than a year, its worst performance in at least six years. Retailers such as Woolworths Group Plc went into administration before Christmas 2008, as the U.K. economy began slumping into what turned into the toughest recession since World War II.

U.K. economic growth slowed more than expected in the second quarter, as consumer spending fell 0.8 percent, the most since 2009, the Office for National Statistics said on Oct. 5. Consumers are spending less as the government implements budget cuts to lower the fiscal deficit and inflation has climbed to more than twice the 2 percent target set by the Bank of England.

U.K. companies have been “exceptionally cautious” in their outlook, so worsening economic conditions this year and austere Christmas trading are priced in for most, Keith McGregor, a restructuring partner at Ernst & Young, said in the report. “ Even a flat final quarter could result in only a modest year-on-year rise in profit warnings,” he said.

Companies issued fewer profit warnings in the third quarter compared with the second, on lowered forecasts rather than economic improvement, according to the report.

--Editors: Peter Branton, Robert Valpuesta

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