More stockmarket-listed retailers issued profit warnings over the summer and early autumn than businesses in any other category, new figures suggest. At the same time, warnings from all UK listed companies reached their highest level in the third quarter of the year than have at that time of year since 2008, EY-Parthenon’s latest Profit Warnings report suggests.
It calculates that a total of 86 profit warnings issued between July and September 2022, up from 51 at the same time last year. That’s a rise of 69% from last year, and of 34% from the previous quarter – when 64 warnings were issued. The highest number of third-quarter warnings was in 2001, with 133.
Some 44 warnings came from consumer-facing companies – the highest since the start of the Covid-19 pandemic – led by retailers. Retailers issued 11 warnings, travel and leisure companies nine and food producers seven.
Seventy per cent of warnings from consumer-facing companies were prompted by rising costs. Many said that they were struggling to pass on price increases to customers, while half of warnings cited falling consumer confidence and a change in buying behaviour.
The analysis found that more than 40% of FTSE-listed retailers and more than 60% of companies in the FTSE personal care, drug and grocery stores categories issued a profit warning in the last 12 months. Falling consumer confidence is now an issue, coming on top of existing rising costs and challenges int he supply chain and labour market. Falling consumer confidence was cited by more than 70% of retailers that issued a third-quarter warning this year, while inventory challenges were also mentioned as demand falls and creates issues related to surplus stock. Retailers are also feeling the impact as sales shift back to stores from online in the wake of the Covid-19 pandemic.
Silvia Rindone, EY UK&I retail lead, says: “The retail sector is facing a challenging winter while according to the EY ITEM Club Autumn Forecast, the UK economy is expected to be in recession until the middle of next year. However, there are steps businesses in the sector can take to prepare. For example, it is critical that retailers use the breathing space provided by the energy price cap to safeguard their long-term survival. This means reviewing their pricing strategy and considering how and where they can pass price rises on, developing robust cash management plans and inventory visibility to avoid costly write-offs.
“Above all, retailers need to adapt to changes in consumer behaviour. Our Future Consumer Index shows that the market is polarised between cash strapped consumers watching every penny and those willing and able to spend if retailers entice them. Navigating this K-shaped profile, focusing on core products, and understanding what will drive growth will be the key to thriving in the current economy.”
Costs and labour market issues
More than half (57%) of profit warnings from all sectors cited rising costs and 23% mentioned labour market issues. Some 28 companies have now issued three profit warnings in the last year, putting them in what EY terms a ‘danger zone’. That’s up from 18 in the previous quarter.
“Businesses are facing an unprecedented combination of headwinds including rising costs, slowing demand and excess supply, making it increasingly difficult to balance competing priorities,” sys Jo Robinson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader. “This quarter, we have seen a significant increase in companies issuing their third or more warning in a 12-month period. With so many uncertainties in the outlook it’s vital that companies develop resilience and demonstrate a clear understanding of how their business will adapt under different geopolitical and economic scenarios. Increasing uncertainty means that events could move quickly for companies that show signs of stress – turning the situation around requires a swift response, sustainable and defendable forecasts, and the building of stakeholder trust in management.”
