British building products retailer Wolseley reported a 25 percent fall in five-month trading profit on Monday and warned that a worsening U.S. housing market is spreading to home repairs and improvement sector and across Europe, sending its shares down 3.7 percent.
Wolseley also said on Monday profit before tax and exceptional items fell almost a third in the five months to end-December, as its U.S. business was hit by the continuing slowdown in housing starts, falling consumer confidence and a weakening U.S. dollar.
"The board expects business conditions in a number of the group's markets to become more challenging over the next few months," the world's largest distributor of plumbing and heating products said, adding it will continue to cut costs and capital spending.
It warned that continued weakness in the U.S. housing market will spread to the repairs, maintenance and improvement (RMI) market, while its European business has also come under increased pressure, with more signs of further slowdown.
"The (U.S.) housing market is likely to deteriorate further until the current high levels of unsold inventory have declined and the full effects of problems in the sub-prime market have been assimilated," it said.
"These conditions, together with reduced availability of credit, are expected to put further pressure on the RMI market."
North American Division Drags Earnings Down
Its North America division, which earns half the group's revenues and includes building materials distribution unit Stock and plumbing and heating operation Ferguson, posted a 10 percent fall in revenue and a more than 40 percent tumble in trading profit.
Wolseley defines trading profit as operating profit before the amortization and impairment of acquired intangibles.
Weak U.S. housing starts, which fell 26 percent during the period, and increased competition forced Stock division to swing to a loss of 25 million pounds.
"It's too difficult to call (when the U.S. housing market to recover)," Finance Director Steve Webster told reporters.
"We expect markets to get a little bit worse. Until the full effect of subprime crisis is seen and until unsold inventory is substantially down... the housing market is likely to get worse before it gets better."
"This is substantially worse than we had expected and is due to the spreading of the U.S. housing market downturn to RMI and commercial construction," Seymour Pierce analyst Kevin Lapwood said.
"The outlook is not positive and we are clearly too high for the year. It looks as if earnings will be down by at least 15 percent this year."
Europe Seen Weakening
In Europe, revenue rose 17 percent and trading profit advanced by 1 percent, as a solid performance in the UK, the Nordic region, Switzerland and the Netherlands was offset by weaker profits in France, Austria and Italy.
"There are signs of further weakening in some European markets as a result of lower consumer confidence, credit pressures and the increased cost of credit," Wolseley said, adding the rate of growth in RMI was likely to slow in the region.
Wolseley, which slashed about 6,000 jobs in its last financial year when it reported its first profit fall in more than a decade, has since cut another 3,000 jobs to combat tough U.S. housing market.
Webster said the group's further cost cut drive will focus on reducing discretionary spending and IT investment and deferring branch openings.