Profit warnings see biggest quarterly rise in almost six years

UK quoted companies issued 75 warnings in Q3 2017, up from 45 the previous quarter

UK quoted companies issued 75 profit warnings in Q3 2017, significantly above the average levels of warnings (62) for a third quarter and up from the 45 issued in Q2. According to EY’s latest Profit Warnings report, the increase from the seven year low recorded in the previous quarter reflects the unpredictable economic climate.

According to the report, the high number of profit warnings exposes a growing divergence between those sectors of the UK economy more exposed to domestic pressures and those benefiting from growth in overseas markets. The FTSE sectors issuing the most profit warnings in Q3 2017 were: Support Services (13), General Retailers (8), Software & Computer Services (5), and Travel & Leisure (5).

Pricing and cost pressures feature in 25 per cent of all profit warnings so far in 2017, compared with 18 per cent in 2016. According to the report, these pressures are especially apparent on the consumer side of the economy. In 2017, 39 per cent of FTSE General Retailers and 59 per cent of FTSE Travel & Leisure warnings have cited rising costs or price pressures. Keeping up in competitive and fast moving markets is compounding margin pressures, with 13 per cent of warnings this quarter also citing unexpected investment costs.

Alan Hudson, EY’s head of restructuring for UK & Ireland, comments: “Summer brought more mixed fortunes for UK plc with the contrast between accelerating overseas markets and the slowing UK economy increasing. Many businesses besieged by pricing pressures before Brexit, are also now feeling the brunt of rising domestic uncertainty and rising costs. A rise in multiple warnings reflects the struggle of some companies caught on the wrong side of economic and digital trends to break free. Companies with a winning formula will continue to thrive, but that formula keeps changing and it’s going to get tougher to keep up.”

Retailers face tightened purses

FTSE General Retailers’ warnings hit their highest third quarter total since 2008 in Q3 2017 with eight warnings and 31 per cent of the sector warning in the year-to-date. Home improvement retailers make up almost half of retail warnings in the last six months, an early warning of falling confidence and increasing pressure on discretionary spend, according to the report.

Jessica Clayton, head of retail transaction advisory services at EY, says: “The rise in FTSE General Retailers profit warnings isn’t dramatic, but comes against a backdrop of falling earnings expectations.Consumers are becoming more discriminating in their spending and, as costs rise, the margin vice is clearly tightening around the sector. 

“Going into the Christmas period, the opportunities and stresses will exaggerate the gap between winners and losers and we expect to see further warnings, especially from those retailers who are struggling to get on the right side of major sector trends or who are struggling with costs. Consumers always find money at Christmas, but their spending won’t be evenly spread and they’ll be driving a hard bargain.”