Profit Warnings On The Rise

Published in Investing on 23 January 2012

The post-crunch downward trend turned back upwards in 2011.

What don't we want? Profit warnings! When don't we want them? Ever!

Of course, profit warnings are an inevitable part of doing business, as no company is always going to meet its expectations year on year without ever faltering. As such, even though it's disappointing to read one, they're often no big deal in the long term scheme of things.

But the latest figures show that, year on year, 2011 was a bit of a tough one.

We have had much-expected warnings from HMV (LSE: HMV) as it lurched from lifeline to lifeline -- and it has just been thrown another one that might have a chance of saving it, and which led to a trebling of the share price. Then less than two weeks ago, we got the first in 20 years from Tesco (LSE: TSCO), and that spooked the punters a bit.

Now, figures released by accountants Ernst & Young show that profit warnings are on the rise, with 88 having been issued in the fourth quarter of the year, up from 51 in the third quarter. That's perhaps not too surprising, as December is the year-end for many companies, and the lead-up to Christmas is important for many. But it was the biggest quarterly jump for 10 years.

Reversing trend

The annual trend looks to be reversing too. The miserable year of 2008 saw 449 profit warnings, and as we started to pull out of the credit crunch, the number fell to 282 in 2009 and 196 in 2010. But for the whole of 2011, the figure was back up to 278.

That is partly due to the travails of the high street, with 39 retailers issuing warnings in 2011, beating the totals for the previous two years combined. And since the end of 2011, we've been hearing of more disappointing Christmas shopping results, and have even seen a few firms going bust -- like Blacks Leisure, which ended up being sold to JD Sports Fashion (LSE: JD)

So what is this telling us for the near future? Well, Ernst & Young suggest the rising profit warnings trend could well continue into this year.

Mixed message

But in some ways, the retail shakeout is welcome. We are well into a cultural change in shopping, with the importance of the whole "high street" concept itself diminishing. And too many outlets have failed to keep pace with the move to internet retail, which is more efficient and convenient for many common goods.

But for strong companies whose profits are taking a short term dip, we may well have some nice buying opportunities ahead.

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> The Motley Fool owns shares in Tesco.

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bogatyrpetrov 23 Jan 2012 , 3:24pm

As a merciless shorter of stocks in trouble I love profit warnings! Why wait 10 years for value to "possibly" come out in weak stocks, when if you scrutinise balance sheets you have an abundance of them showing glaring warning signs. Go for the jugular I say!

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