The Investment Column: Costs catch up with Sherwood

When Sherwood Group, the lingerie and lace manufacturer, included two glossy pull-outs of scantily clad models in its annual report in April some City investors feared the worst. This, they said, was normally a bad sign. An attempt to distract the reader from some ropey figures at the back of the document. In fact, the full-year numbers were pretty good and investors felt that Sherwood had somehow managed to buck the trend in the troubled textile sector hit by a combination of high raw material costs, weak demand and weather that depressed sales of everything from woolly jumpers to socks. In fact, Sherwood has run into some of the same problems, only later.

Yesterday's profits warning showed that the group's performance has been adversely affected by weak consumer demand, not in the UK but in continental Europe. The downturn will mean the half-year profits will show a "significant shortfall" on last year when the company made pounds 7.24m.

In the garment division, the Italian lingerie manufacturer Lepel has been hit by weaker demand, particularly from supermarkets. European demand for Sherwood's lace has also been under pressure, particularly from cheaper versions from Italy, and the company will take a pounds 500,000 re-structuring this year to cut costs in Holland and Germany. The company needs to move upmarket to differentiate itself more and the only bright spot is the UK where the lace business improved.

With the board expecting the soggy market to continue throughout the summer before an upturn in the final quarter, there is little here to cheer shareholders. The shares fell another 9p to 73p yesterday. With NatWest forecasting full-year profits of pounds 14m, the shares trade on a forward rating of 10. Given the uncertainties, that is about right.