Persistent economic uncertainty driving rise in profit warnings

This is a year-on-year increase on the 72 issued in the first quarter of last year and is the highest first quarter total since the early stages of the pandemic in 2020, during which time 305 were issued. Additionally, quarterly profit warnings have remained above the 10-year quarterly average – excluding 2020 – for five consecutive quarters.  

A major driver of this has been the “persistent economic uncertainty” the UK has faced, with 35% of profit warnings citing delayed, reviewed or cancelled contracts – up from the 21% seen during the same period in 2022.  

EY’s report also found that, since the start of 2022, 98 companies have issued at least two profit warnings, while a significant cohort of UK companies have faced particularly challenging conditions after entering what it describes as the three warning “danger zone”, with 31 companies doing so since the start of last year.  

Of these, 29% have since been delisted or are in the process of being sold, marking a greater-than-average market dropout rate, as typically one-in-five companies delist within a year of their third warning – mostly due to insolvency.  

Jo Robinson, EY-Parthenon partner and UK and Ireland turnaround and restructuring strategy leader, said: “Economic forecasts may have seen some improvement in recent months, however the extraordinary strength of headwinds over the last two years has left some businesses facing recession-like conditions.  

“This has taken its toll on business confidence and, as pressures move through the supply chain, we’ve seen a higher number of companies warning of delayed or cancelled contracts in comparison to the last quarter. This economic uncertainty risks prolonging recovery, even as forecasts improve.  

“Many companies may struggle to build momentum as they contend with increased working capital demands and finance costs. We would normally expect to see insolvency activity peak nine to 12 months after a profit warning peak, so the coming year will be crucial.  

“While the UK economy appears to be turning a corner, recovery is not guaranteed. Businesses should continue scenario planning and building solid operational and financial foundations to withstand further shocks and capitalise on growth.” 

In contrast, UK-listed retailers issued five profit warnings at the start of 2023 – marking a decrease from the nine issued in both the final and first quarters of 2022 – representing the sector’s lowest quarterly total since the fourth quarter of 2020. Despite this, persistent inflation, high interest rates and tightening consumer spending will challenge a delicate sector.  

Responding to these figures, EY UK and Ireland’s retail lead Silvia Rindone said: “Retailers enjoyed a better-than-expected earnings season during 2022’s festive period, however this was a relative success given how far forecasts had fallen during 2022.  

“Almost half of the sector warned in 2022 and almost a third have issued two or more profit warnings since the start of 2022. Of the consumer sector companies that moved into the ‘three warning’ danger area since the start of 2022, 30% have gone into administration or have been put up for sale. 

“The economic backdrop is improving, however inflation and interest rates will continue to put a squeeze on disposable income. EY ITEM Club’s Spring Forecast reported that the UK economy is now expected to avoid both a technical recession and a calendar year contraction in 2023.  

“While this is an improvement on earlier forecasts, a difficult backdrop for the consumer sector remains as retailers face significant working capital challenges. 

“Companies need to act now to understand potential cashflow pinch points and avoid a liquidity crunch by modelling different scenarios and understanding how they will affect working capital. Tough decisions will need to be made to prioritise working capital investment and conserve cash.”