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Philips shares plunge on profit warning

Amsterdam - Philips Electronics warned of sharply lower profits at its lighting division and toasters-to-shavers consumer business, due to weak demand in Europe.

The profit warning, which wiped 12.9% off the shares, caps a string of disappointments from Philips and suggests consumer demand in Europe is likely to remain fragile against a backdrop of economic uncertainty, particularly in the peripheral eurozone countries.

The Dutch group, which ranks as the world’s biggest lighting maker, Europe’s largest consumer electronics producer and a top-three maker of hospital equipment, said it would cut costs as part of its wider restructuring.

Philips has struggled to compete with lower-cost Asian makers of consumer electronics, while tepid consumer confidence and economic growth in Europe and the US have hit demand for products ranging from televisions to electric toothbrushes, as well as its street and home lighting systems.

The profit warning “shows that consumers in mature markets are in dire straits”, said Sjoerd Ummels, an analyst at ING who covers Philips.

“High unemployment, low real wage growth and low consumer confidence have dented sales performance. This is a very trying time for companies geared to mature-market consumers.”

Further evidence of weak consumer demand came from Kesa, Europe’s third-biggest electricals retailer, which earlier on Wednesday said it was considering the sale of its loss-making Comet chain in the UK after trade across the group worsened in its new financial year.

UK consumer electronics sales have been hit hard as shoppers cut back on discretionary purchases in the face of rising prices and government austerity measures. Kesa said that sales of televisions had proved particularly poor.

Shake-up

For many years, Philips was considered a leading innovator - its wake-up lights are a staple of many a Dutch household in the winter months - but it is now under intense pressure to shake up its myriad business lines and improve profitability.

Restructuring specialist Frans van Houten, who took over as chief executive in April, has promised a review of all the businesses and a dramatic overhaul to lift profit growth.

Several senior Philips executives have quit in recent months, since Van Houten joined as chief executive-in-waiting. Van Houten moved quickly to hive off the group’s loss-making TV business to a 30/70 joint venture with Hong Kong-based monitor maker TPV, with the option to sell out.

But some analysts said the latest profit warning was a blow to Philips’ credibility and could dent investor confidence.

“While it is tempting to see the decline as a buying opportunity, we believe today’s profit warning will undermine investors’ faith in the new management, precluding a swift rebound,” said S&P Equity Research in a note to clients.

Philips’ 12.9% slide wiped €2.33bn off its market cap and pushed it near a two-year low, in volume of four times the stock’s daily average. It was by far the biggest loser on the broad STOXX 600 index.

Philips said its lighting division, whose products include energy-saving lamps used in the Eiffel Tower, would report “low single-digit comparable sales growth” in the second quarter because of weak consumer demand and stagnant construction markets in Europe. 
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