Phones 4u has reportedly suffered a 25% collapse in earnings this year, driven by a rise in smartphone-based insurance claims.
According to a report in The Guardian, Phones 4u, which changed hands in a £700m secondary buyout in March when Providence Equity Partners sold out to fellow private equity firm BC Partners, is now expected to earn £120m for the year, down from the £140m forecast by credit rating agency Standard & Poor's.
The agency has raised concerns about Phones 4u's debt profile, saying the firm would slip into its ‘highly leveraged’ category if earnings fell further.
Figures quoted by the newspaper show earnings before financial charges down by a quarter to £74.1m in the nine months to 30 September compared to the same period last year, while turnover is likely to rise from £911m in 2010 to £940m.
However, the cost of replacing smartphones, added to competition from other insurers, has been denting profits at Phones 4u's insurance division, which has in the past accounted for more than half of the company's earnings.
Last year, the division's margins fell from 46% to 31% of sales. Earnings fell from £65m to £56m despite a rise in turnover to £179m.
Phones 4u’s chief executive Tim Whiting said: ‘We are one of the few people on the high street opening more stores. The environment is tough but we are fortunate to be taking market share and in a category that the consumer is demanding very highly.’
With the new iPhone and Nokia's Lumia 800 both launched in the final quarter, Phones 4u is hoping to recover lost ground in pre-Christmas sales.
Whiting is quoted as forecasting full-year earnings of between £120m to £130m, guiding towards the bottom of the range. This compares to £130m last year.