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UK retailers issuing profit warnings at the highest rate since the early months of the pandemic: analysis

Image: Vlad Kochelaevskiy/Shutterstock

UK retailers have issued profit warnings in the first quarter of 2022 at the highest rate since the pandemic started, new analysis suggests.

The EY-Parthenon Profit Warnings report finds that UK-listed companies have issued 72 profit warnings so far this year, the highest quarterly figure since the second quarter of 2020. The highest number of warnings came from retailers, who have issued a total of nine. In all, 17% of listed retailers have issued a profit warning in the first quarter of the year and 34% have issued a warning in the last year.

Of the warnings issued by retailers, 67% mentioned supply chain disruption, 75% mentioned increased costs and more than half (56%) pointed to staffing issues in the last six months.

Silvia Rindone, EY UK&I retail lead, says: “Our data underlines the challenges ahead for UK retail. The sector’s problems so far have been largely on the supply – rather than demand – side. Companies will now be facing a combination of supply chain, cost, and demand headwinds, as the rise in the cost-of-living affects real incomes and creates a challenge for the sales growth that has helped drive the recovery so far.

“It is vital that companies respond to consumers’ concerns. Our latest Future Consumer Index revealed that more than two-thirds of UK consumers are worried about their finances. So, we expect significant ‘trading down’, as we saw in the last financial crisis, but we also expect an increasing focus on ‘value for money’ options as sustainability-conscious consumers look for purchases that will last. Retailers will also need to focus on operational resilience by creating clear inventory visibility and a strong cash culture to minimise costly write-offs and optimise working capital to ensure they have the capital necessary to focus on growth and transformation. Digital opportunities and consumer expectations will continue to grow, regardless of the economic backdrop.”

Other warnings came from personal care, drug and grocery stores (6) – a group that also includes multichannel retailers – and industrial support services businesses (7). Of all of the warnings issued, 43% were due to rising costs and 11% to factors related to the impact of war in Ukraine. Profit warnings from consumer facing sectors reached their highest level for almost two years, says the EY report.

Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, says: “2022 was always going to be a difficult year for companies to navigate as inflationary pressures, which had been building throughout 2021, were already putting pressure on company margins and consumers’ real incomes. The war in Ukraine has contributed to greater supply-side pressures and raised questions about confidence and demand in 2022. We are now looking at a year with ongoing COVID-19 disruption alongside higher inflation, greater uncertainty, and faster monetary tightening than we expected just a few months ago.

“The post-pandemic recovery should continue in 2022 but will be slower than expected with greater downside risks. Volatility and uncertainty have become the standard backdrop to operations, and companies need to ask themselves when ‘crisis as usual’ becomes the norm for which they plan. Businesses will need to start thinking about how their operations and wider ecosystem will fare in sustained headwinds, and how they can reshape in response to long-term change.”

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