Laura Ashley `in danger of breaching covenants'

Laura Ashley, the troubled fashion clothing retailer, yesterday admitted that it is in danger of breaching its banking covenants. The admission came as the group issued its third profits warning this year. Sameena Ahmad reports on the growing pressure facing the company and its embattled chief executive, Ann Iverson.

Laura Ashley yesterday admitted that it is in critical talks with its banks over the likelihood that it will break key banking covenants in the next six months. The group fell into the red in the last half-year and passed its interim dividend. If it makes a loss for the full year it will breach the covenants which stipulate that interest charges must be covered three times by profits.

The syndicate of six banks which provided Laura Ashley with a pounds 50m overdraft facility this year has granted the group temporary exemption, but is in ongoing discussions with it. The news will increase pressure on Ms Iverson to cut costs and improve the performance of the business or resign.

Ms Iverson yesterday admitted the company she was brought in to revive two years ago had run out of control. A month after predicting the group would break even at the full year, Ms Iverson has warned full-year profits will fall short of the break-even target.

This is Laura Ashley's third profits warning in a year and sent the group's share price down 6.5p to 59p.

Speaking as the company announced interim losses to July of pounds 4.5m compared to a pounds 5.2m profit last time and a collapse in gross margins, Ms Iverson said that the group's rapid expansion programme, particularly in the US, had been a mistake:

"Looking back, we expanded too fast, too soon. The business couldn't cope. We didn't have the proper infrastructure to support expansion." The group which opened 19 new stores in the US last year and 13 this year would now halt its store-opening programme there.

Among a catalogue of problems, Ms Iverson listed excessively high operating costs and failure to accurately predict demand, which led to overstocking in the spring of summer fashions and sharp price mark-downs on home furnishings in the US.

She said that rapid growth had also exposed problems in the supply chain: "People can't order a sofa from us and get it on time. If you haven't anticipated demand properly, you don't have the capacity ready in the factory." She said that the appointment last week of David Hoare as chief operating officer was to address these operational issues.

Ms Iverson would not be drawn on the timing or scale of cost cuts but said Mr Hoare had a free rein: "We have to ask what areas we do not want to cut costs in. There are no sacred cows."

She denied that she was considering resigning or had been asked to resign by shareholders. However, she did feel pressure and had been asked "challenging questions" by Sir Bernard Ashley who owns around 35 per cent of the company's shares.

"I do feel the pressure. You bet I do. When I came here I thought it would be a four-year job. This has been a setback, it has slowed us down, but when we come out of it we will be healthier. We are addressing the issues and my personal commitment has always been there."

However, analysts, who predict the company will make a pounds 10m loss in the full year, were sceptical:

"She has made this company worse not better. Her position looks pretty untenable," said one. "To say a month ago that the company would break even and then a month later that it wouldn't is very worrying."

Another said she had failed in her key job of reviving the brand: "She appears to have alienated her traditional customers without enticing anyone else in.

"You have got to be absolutely sure that you have the ranges right, before opening huge new stores."