Woolworths issues profits warning

Woolworths lurched to a new low on Tuesday after the variety retailer and wholesaler issued a profit warning on the back of falling like-for-like sales and margins.

An unexpected stock clearance at its warehouse, which supplies CDs, DVDs and books to retailers such as Wm Morrison, prompted speculation that Woolworths needed to dredge up cash.

Meanwhile, the company has failed to milk its biggest potential cash cow – the 2entertain joint venture with the BBC, which publishes titles such as the Blue Planet – after deciding it would get a poor price for its 40 per cent stake.

Philip Dorgan, analyst at Panmure Gordon, condemned a “dreadful” trading statement and added that the 2e decision meant “the rather tenuous break-up argument is in tatters”.

Like-for-like sales in its stores in the past six weeks fell 6.7 per cent, after dropping 2.2 per cent in the previous 19 weeks. The gross margin for the first half is now expected to be 125 basis points lower than in the same period last year.

Richard North, chairman, said Woolworths had been “creditable” before a sharp downturn since the beginning of June.

Group sales in the 25 weeks to July 26 fell 3.1 per cent, with the Woolworths chain largely responsible. Its sales fell 3.2 per cent in total; the group blamed poor weather for weak sales of clothing and outdoor goods.

David Stoddart, analyst at Altium Securities, said he was concerned that average net debt was higher in spite of a cash injection from the sale of stores. Analysts were preparing to cut forecasts of profit from about £25m to as little as zero before exceptional items.

The shares closed 0.94p lower at 5.55p, giving the company a market capitalisation of about £80m.

Among the surprises in the statement was the decision to sell a proportion of “catalogue” stock from the wholesale Entertainment UK arm.

“We made the decision . . . to liquidate it and turn it into cash,” said Mr North. But the clearance did not imply a weakening of the balance sheet.

Woolworths agreed a £350m asset-backed lending deal in January. On Tuesday it said it had “secure, medium- term finance which flexes with the seasonal requirements of the businesses”.

Without a chief executive since Trevor Bish-Jones was asked to step down in June, Mr North said there was no need to rush the search process to find a replacement.

A review by external consultants had shown that there was a “considerable opportunity to build a sustainable retail proposition based primarily on its small to medium-sized stores”.