Stores suffer as Iceland earnings dive

Profit warnings: Food retailer's troubles knock high street shares and telecoms manufacturer predicts further slump

Shares in food retailers were hit badly yesterday as the frozen foods chain Iceland repeated its profits warning for the year and reported a bigger-than-expected fall in earnings in the first half.

Pre-tax profits for the six months to the end of June were down by 11.3 per cent to pounds 29.8m - the first profits fall in Iceland's 25-year history - compared with market expectations of just over pounds 30m. In July, Iceland forecast that first-half profits would be about 10 per cent lower.

The worse-than-expected profit figures were accompanied by a warning that like-for-like sales to date in the second half were down by 0.5 per cent, while profits would be further affected by Iceland's investment programme and its Pricewatch campaign.

Analysts immediately downgraded their profit forecasts for the full year as shares in Iceland and other high street supermarket groups tumbled. Henderson Crosthwaite has lowered its profit forecast for the year from pounds 63m to under pounds 60m, while BZW has gone from pounds 59m this year to pounds 57m and from pounds 55m to pounds 51.5m for 1997.

Shares in Iceland fell by nearly 10 per cent from 101.5p to 92p, dragging the food retailing sector with them. Worst hit were rival low-cost supermarket chains Kwik Save, down 19.5p at 372p, and the newly-floated Somerfield, off 2.5p at 155p.

Since Iceland's initial profit warning on 18 July, its shares have fallen by 35 per cent. The group blamed the first profit warning on poor sales, price wars and the cost of its store refurbishment programme.

Yesterday there was more bad news in the shape of a warning that the Pricewatch campaign would bite into margins in the second half, while profits would be further affected by loss of sales caused by temporary closure of stores for refurbishment.

Malcolm Walker, chairman, said: "Naturally, it is disappointing to report the first profit setback in Iceland's history. The UK food retail market is the most advanced and fiercely competitive in the world and our business has encountered unprecedented pressures during 1996."

He pledged that Iceland's recovery plan, including 130 new product lines, 30 store openings this year and the refurbishment of a further 150 stores next year, would restore real sales growth and returns to shareholders. The interim dividend was raised by 9 per cent to 1.8p.

But analysts chose to focus on the shorter term and the poorer-than- expected trading outlook. David Stoddart of Henderson Crosthwaite said: "We had all been pointed in the direction of lower first-half profits but it is a disappointment that the second-half performance will also be affected. There could potentially be quite a hit on operating margins in the second half."