66% increase in profit warnings issued by UK-listed companies

The findings from management consultancy EY-Parthenon’s latest Profit Warnings report also found there was a record number of companies citing rising costs as the reason behind their warning. 

Overall, it reveals 136 issued profit warnings in the first half of 2022 - up from 82 in the first six months of 2021. In the second quarter of 2022, 64 warnings were issued - which is slightly down from the 72 issued in the first quarter, but is still 10% above the pre-pandemic average and double the 32 warnings issued in the second quarter of 2021. 

Half of all the profit warnings issued in the first half of 2022 by UK-listed companies came from consumer-facing sectors - this is compared to a third during the same period the previous year. 

Of these businesses, FTSE retailers issued profit warnings in the first half of 2022 when compared to 10 warnings in the first half of 2021. Three-quarters of these came from companies that operate either exclusively or mostly online. 

These firms have been particularly affected by the shift in sales back to “bricks and mortar” stores that were disproportionately affected by increasing delivery costs and product returns. 

 In addition to this, warnings in FTSE personal care, drug and grocery stores sector reached a record high of 13. 

Commenting on the news, EY-Parthnenon’s consumer products and retail sector leader in the UK and Ireland Amber Mace said: “The data underlines the significant difficulty companies face when trying to pass price increases on to consumers who are reducing their spending levels, which, in turn, is creating tensions along the supply chain and leading to high levels of unsold stock.

“Companies which are managing to weather the storm are those which have a strong focus on demand optimisation and are responding to the needs of their customers by providing value for money and sustainable options. 

“They are also developing robust plans to manage cost inflation and have strong processes in place around cash management and inventory visibility to minimise costly write-offs.”

Of the warnings issued in the second quarter of 2022, a record 58% of companies cited rising costs as one of the main reasons behind the warning, up from 43% in the first quarter, while 19% noted labour market issues. 

In total, of the 1,222 UK-listed companies, 70 have had at least two consecutive warnings in the last 12 months. On average, one-in-five companies delist within a year of their third warning, most due to insolvency. 

Commenting on this, Alan Hudson - EY-Parthenon partner, and the UK and Ireland’s turnaround and restructuring strategy leader - said: “Companies are facing a myriad of headwinds that will challenge even experienced management teams. 

“In the second quarter of 2022, we moved into yet more uncharted territory as inflation and interest rates reached multi-year highs while consumer confidence fell to record lows – all against a backdrop of geopolitical tension. 

“Over the first half of this year, we have seen profit warnings prompted primarily by cost and supply chain issues, but as we start to see a fall in consumer demand and confidence, it is likely that other underlying stresses will become exposed.

“Businesses will need to prepare for lower growth, tighter capital and significant market volatility in the coming months. As profit warnings and stress levels rise, we’re starting to see more companies issue multiple profit warnings and a return of companies approaching the ‘three warning rule’.” 

FTSE finance and credit services companies, meanwhile, issued seven profit warnings in the first half of 2022. And, if you remove what researchers describe as the “unprecedented and far outlying pandemic affected the year of 2020” from the analysis, this is the sector’s highest first-half total for profit warnings since 2009, just after the global financial crisis. 

In addition to contending with challenging market conditions, the consumer finance sector is under continued regulatory scrutiny. These challenges will be further exacerbated as pressure builds on consumer finances, and the Financial Conduct Authority is setting increasingly clear expectations of how it expects firms to help consumers in difficulty. 

At the same time the Bank of England has recognised that if firms tighten their lending criteria too quickly, this may have an adverse economic impact. 

Hudson explained: “A smaller, more regulated, and more risk-averse sector could lower lending levels - especially in riskier areas. This has implications for consumer spending, particularly for retailers that rely on credit-based purchases.  

“Credit providers in the best position will be those that have restructured, created a solid balance sheet, and invested in a technology platform on which to base their lending and weather any storms ahead.”