Home Business News Profit warnings from UK-listed companies exceed those issued at height of 2008 financial crisis

Profit warnings from UK-listed companies exceed those issued at height of 2008 financial crisis

by Amy Johnson LLB Finance Reporter
29th Jan 24 9:21 am

The percentage of UK-listed companies issuing profit warnings last year exceeded the levels seen at the peak of the financial crisis in 2008 as 18.2% of public firms issued warnings, according to EY-Parthenon’s latest Profit Warnings report.

In total, 294 profit warnings were issued in 2023, a small decrease of 11 from 2022 when 305 warnings were given.

But the percentage of companies warning was still exceptionally high at 18.2%, higher than 17.7% at the peak of the global financial crisis in 2008.  Last year, over a quarter of warnings (26%) were attributed to delayed contracts or decisions, 19% were due to increased costs and a further 19% cited the impact of higher interest rates.

In Q4 2023, 77 warnings were issued versus 76 in the prior quarter. Cost pressures appeared to ease towards the end of 2023, causing just 10% of warnings in Q4 compared to 41% in the same period the year before. However, corporate spending delays and higher interest rates became an increasing issue in 2023, with the latter prompting 24% of profit warnings in H2 2023, compared with 14% in the first half of the year.

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Smaller companies, which are more vulnerable to demand and margin pressures, dominated warnings at the start of the 2023. However, by Q4 pressure had broadened as a third of the companies warning (33%) had annual revenues of over £1 billion, more than double the average number of warnings given by businesses of this size.

In 2023, 39 listed companies issued their third or more consecutive profit warning in 12 months, representing 18% of all companies that issued a warning last year. This compares to 31 companies that issued their third or more consecutive profit warning over a 12-month period in 2022. To date, 13% of companies that warned over profits for a third or more time in 2023 have gone on to de-list.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, said, “Pervasive uncertainty in 2023 created major challenges for businesses around earnings and forecasting, and this is reflected in the number of profit warnings issued last year.

“While pressure around costs eased somewhat toward the year-end, the uptick in warnings caused by delays to business decisions and weak consumer confidence indicates an ongoing reluctance to commit to discretionary spending.

“In 2024, businesses will hope for a quicker-than-expected fall in inflation and interest rates, but many moving parts need to slot into place before we can be sure of an economic ‘soft landing’. We expect to see increasing disparity between businesses that are positioned to capitalise on still limited growth and those that are hampered by the impact of recent earnings pressures or their access to and the cost of capital. It is shaping up to be an easier year for many, but not all UK companies.”

Industrial and consumer sectors lead profit warnings

FTSE Industrial Support Services issued the highest number of warnings in 2023 with 25, the largest amount reported by the sector since the pandemic. This was followed by FTSE Retailers (24), FTSE Software and Computer Services (21), FTSE Media (17) and FTSE Construction and Materials (16).

Companies within FTSE Consumer Discretionary sectors also issued the most profit warnings in Q4 2023, accounting for 35% of all warnings in the period. FTSE Industrials sectors made up the second largest contingent of warnings at 31% – an uptick from 26% in the previous quarter.

Half of all FTSE Leisure Goods companies issued a profit warning in 2023. High rates of warnings were also seen across FTSE Household Goods and Home Construction (45%) and FTSE Chemicals (41%) during 2023, the latter of which saw a record number of companies issue warnings (11).

FTSE Retailers under increasing pressure

The rate of profit warnings remained high for FTSE Retailers – the sector issued 24 profit warnings in 2023, compared with 36 issued in 2022. Retail was one of the hardest hit sectors last year, with two in every five FTSE Retailers warning during 2023. The pressure on disposable incomes, whilst easing, remains high, meaning discretionary spending in non-food areas such as fashion continues to be impacted.

George Mills, Partner and Special Situations Debt Advisory Lead at EY said, “At the end of 2023 we saw a rising number of warnings from sectors at the foundation of supply chains, like chemicals, and those reliant on business confidence, such as recruitment.

“Consumer spending on staples has recovered, but an elevated level of warnings in FTSE Retailers highlights the persistent strain on discretionary spending.

“Traditional funders will be cautious about investing in sectors with high consumer discretionary exposure. Businesses will need to demonstrate strong historical performance as well as robust forecasts capable of withstanding a future downturn if they want to refinance on the best terms.

“If not, they risk encountering challenges when refinancing and may have to explore other avenues for capital, such as turning to alternative lenders or seeking equity injections.”

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