Compass crashes on profits warning

Compass Destroyed investor confidence in its vast catering empire yesterday with a profits warning that wiped £1.7bn off the value of the company.

Compass Destroyed investor confidence in its vast catering empire yesterday with a profits warning that wiped £1.7bn off the value of the company.

The group, which was demerged from Granada three years ago, said a raft of trading problems - mainly in the UK - would knock £30m off its operating profits for 2004.

Its underlying working capital outflow would be £200m more than it had bargained for, it added, putting pressure on its free cash flow.

Shares in the FTSE 100 company tumbled 25 per cent to 239.25p, just above an all-time low. "It is inconceivable Compass will trade on a premium to the UK market or business services sector in the short term," analysts at Dresdner Kleinwort Wasserstein said.

Compass, which owns the Café Ritazza, Upper Crust and Harry Ramsden's food chains, blamed the profit shortfall in part on the revelation that its multimillion-pound contracts with the local education authorities (LEAs) to provide school meals were proving at least £5m less profitable than anticipated.

Mike Bailey, the chief executive, said: "We are in much debate with the LEAs about the cost of a school meal. Trying to produce what they are looking for at a price of about 42p per meal is not simple. In some school districts we are running contracts at a loss, and that will not go away in the short term."

The group said its move to provide in-store restaurants for retailers such as Woolworths would cost it £5m in start-up costs this year. It expects to open 600 such cafés over the next three years in what is a push into yet another new sector for the group. "It's a nice problem to have," Mr Bailey said.

The financial collapse of one its top five distributors also hit its UK arm, forcing the group to switch to a new, more expensive, distributor. The group will have to write off the £13m it spent trying to shore up the troubled distributor, Mr Bailey admitted.

The final area of woe was on the Continent, where the group said trading conditions had been "disappointing". It blamed the prolonged economic slump in places such as France, Scandinavia and Germany, where the high unemployment rate has left Compass with fewer mouths to feed.

The catering group attempted to soften the profits blow by saying that its full year like-for-like turnover was expected to climb 7 per cent, while its earnings per share would rise 8 per cent. Its margin, however, which has been increasing at an annual rate of around 20 basis points, will be flat.

Analysts at DKW cut their 2005 pre-tax profit forecast by £50m to £729m.

Asked if he thought shareholders would ever trust the company again, Mr Bailey said: "It [confidence] will come back. I don't see a particular issue. We are growing in all areas, most geographies are doing quite well. Yes we've had a blip and we've paid for it. But I think the shares are a crackerjack price - I've just bought 100,000."

He denied that the profit warning had been sparked by the recent arrival of a new finance director - Andrew Martin, who joined the catering company from the holiday group First Choice.

The sprawling group, which has been roundly criticised in the City for its aggressive acquisition programme, reiterated its promise to focus on organic growth. It said it had spent just £160m on buying businesses this year - down from more than £2bn two years ago. It added: "The fundamentals of the business are very strong and the focus continues to be very clearly on driving organic growth."