FTSE Retailers issued five profit warnings during the second quarter of 2023, taking the total for the first six months of the year to 10, according to EY-Parthenon’s latest Profit Warnings report.
The 10 warnings for the first half of 2023 represents a fall from the 16 warnings issued by FTSE Retailers during the same period in 2022.
However, more than a fifth of companies (six) in the ‘three warning danger zone’ came from either FTSE Retailers or FTSE Personal Care, Drug and Grocery Store sectors. These businesses may find themselves vulnerable if cost-of-living concerns continue to squeeze consumer incomes and spending.
Overall, companies within Consumer Staples FTSE sectors – including supermarkets and FMCG companies – have seen a substantial fall in the number of profit warnings, with just six reported in the first half of 2023, against 19 recorded in H1 2022.
Silvia Rindone, EY UK&I Retail Lead, said: “Retailers have enjoyed a relatively positive start to the year, with lower costs also helping companies to meet subdued forecasts. But this could just be the eye of the storm.
“Energy and food costs are falling, but this release of pressure on disposable incomes is being increasingly offset by increasing rent and mortgage costs. Our latest Future Consumer Index shows UK consumers’ confidence and ability to spend has all but disappeared in the face of these pressures, with 62% of consumers extremely concerned by the cost-of-living crisis and two-thirds (67%) expecting it to get worse over the next six months.
“Brands and retailers need to understand the factors influencing their customers and how these make a difference to spending patterns and attitudes. This will help businesses to continuously re-evaluate and simplify ranges and pricing to meet the needs of today’s consumer”
National profit warnings rise for seventh consecutive quarter
Nationally, profit warnings issued by UK-listed companies between April and June 2023 marked the highest second quarter total in three years, with 66 warnings issued.
The report found that warnings from UK-listed companies have risen year-on-year for the seventh consecutive quarter, the longest run of consecutive quarterly increases since 2008. The highest number of Q2 warnings recorded by EY-Parthenon was in 2020, when 166 were issued.
Persistent inflation and rising interest rates have played a significant role in Q2’s warnings, driving a tighter and more expensive lending environment. Changing credit conditions were cited in one-in-five (20%) profit warnings during the quarter, the highest proportion since Q2 2008 and up from one-in-ten (9%) in Q1 2022.
Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader said, “The sustained rise in profit warnings over the last two years reflects the extraordinary mix of challenges faced by UK businesses over that timeframe. It’s now clear that the effects of these low-growth conditions are spreading to nearly all corners of the UK economy, and this quarter we’ve seen earnings pressure extend up the value chain into the mid-market.
“Rising interest rates have significantly changed credit conditions for companies that need to refinance, and businesses have started to feel the effect of a more expensive borrowing environment, especially in sectors where credit availability has been a key driver of activity.
“The number of businesses that had previously locked in low interest rates has postponed some of the challenges, but not indefinitely. We’ll likely see credit cost and availability play an increasingly significant role in restructuring activity as more businesses encounter a markedly different refinancing landscape.
“Insolvency activity typically peaks nine to twelve months after a profit warning peak. Conditions are likely to remain challenging and those businesses best placed to persevere will be those that can reshape their operations to withstand further shocks and capitalise on growth.”