Shares in struggling media and print group ST Ives(LSE: SIV) slumped by as much as 40% in early trade this morning after the company issued a dire profit warning.
Specifically, the company announced today that due to deteriorating market conditions, management expects reported profit for the current financial year will be "materially below" current market expectations. What's more, management believes that the current trading conditions will also impact the group's next financial year, indicating that ST Ives' troubles are quite serious.
A severe deterioration in trading
According to today's press release from the company, trading in the eight months to the beginning of April had been "broadly in line" with expectations with revenue up by 5%. However, trading has deteriorated significantly over the past few weeks and now ST Ives' outlook for the final quarter to end-July and following financial year has worsened.
All three of the group's main trading divisions have suffered during the first four months of 2016. Trading across the Strategic Marketing segment has been hammered by "global economic uncertainty", which is "resulting in greater caution in the allocation of marketing budgets". Uncertainty has only "increased of late, resulting in significant projects being deferred or cancelled."
Meanwhile, revenue at the group's Marketing Activation arm is running approximately 11% below the prior year, "due in large part to the ongoing pressures within the UK grocery retail sector". The Marketing Activation arm is also suffering from margin pressures.
And lastly, sales at ST Ives' books business are running slightly behind (-1%) the prior year's numbers as industry de-stocking has offset a new contract with Penguin Random House.
Today's profit warning couldn't have come at a worse time for shareholders as, after nearly a decade of restructuring, the company's underlying unadjusted profits were expected to stabilise this year.
Indeed, City forecasts were up until this morning, predicting that ST Ives would report a pre-tax profit of £37.4m for the year ending 31 July. Last year the company reported a pre-tax profit of £8.7m and over the five years between 2011 and 2015 the group only reported unadjusted cumulative pre-tax profits of £49.4m.
This explains why the shares have fallen so heavily this morning. Many investors were pinning their hopes on a long-awaited recovery this year. Unfortunately, it now looks as if investors will have to wait another two years for the company's recovery to gain traction.
Weak balance sheet
Whether or not the group can get back on the path of growth remains to be seen. Almost all of the three main divisions are facing structural headwinds, which is why the company has been trying to rebuild, and diversify its business since the financial crisis. But more importantly, ST Ives' weak balance sheet is going to be a problem for the company and its investors if trading continues to worsen.
At the end of January 2016, ST Ives had only £14m of cash supporting £96m of long-term debt related to the business and £21m in retirement obligations. Further, intangible assets on the balance sheet amounted to £200m and if you strip these assets out shareholder equity comes in at around -£70m. Put simply, the balance sheet isn't robust enough to be able to survive a prolonged deterioration in trading without an additional cash infusion.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.