Retail bears brunt of sluggish first half of 2018 with 20 profit warnings

26 July 2018 Authored by Consultancy.uk

The number of profit warnings by FTSE-listed retailers has doubled since the same period of 2017, while the UK economy as a whole has seen profit warnings hit a seven year high. The dramatic rise has seen the number of top retailers flagging concerns in the first half of the year at a seven year high, as the sector continues to be plagued by rising costs and subdued spending.

Big Four firm EY has released data revealing that the British economy has endured a turbulent opening to 2018. There were a total of 131 profit warnings in the first half of 2018, thanks to a sharp rise in the second quarter. Q2 saw 58 profit warnings, and while this was down from 73 in Q1, Q2 is the quarter which traditionally sees the lowest number of retail profit warnings. That it represents a significant climb from the 45 seen in 2017’s second quarter will undoubtedly be a cause for concern, as many companies face an uphill struggle to recover in the second half of a sluggish 2018 – particularly in the retail sector.

Number of profit warnings by quarter

This continues a 2017 of two halves for the UK. The British economy grew faster than forecasted, and UK quoted companies issued 276 profit warnings, the lowest total since 2013, something reflected in the lowest number of retail store closures in seven years. However, after mid-summer, the market saw an increase in restructurings and profit warnings that reflected a rise in cost and demand pressures building across a significant portion of the economy, thanks to Brexit and wage stagnation, among other challenges.

Retail feels pinch

According to EY, the number of profit warnings by FTSE-listed retailers has doubled over the past year, as the sector has been acutely hit by rising costs and subdued spending. This has seen 20 profit warnings in the sector during the first half of 2018, double those issued at the same time in 2017 – which eventually saw 24 for the whole year. Indeed, these alarming figures are snaking toward more than 40% of FTSE retailers issuing profit warnings – which has not been the case since the 2008 financial crisis, despite the double-dip recession of 2011.

Percentage of FTSE General Retailers and UK listed companies issuing a profit warning

A number of well-known retailers have issued profit warnings in 2018, including Debenhams, Moss Bros, Carpetright and Card Factory. On top of this, there has been a spike in retail administrations and restructurings, with a growing number of firms opting to use a Company Voluntary Arrangement (CVA) to close stores, and preserve broader brands. Non-listed retailers such as New Look and House of Fraser have also used CVAs, leading to thousands of job losses. Such a process must be approved by landlords, who have been expressing anger at the high number of CVAs taking place in the sector, particularly in the case of House of Fraser.

EY’s report said CVAs were "just one part of the solution" for distressed businesses,” before adding, "To stay in this ever-changing game, retailers will need to invest more and take more risks. But many lack the capital and wherewithal to move forward. Thus, we expect to see a continuing divergence of fortunes in 2018, especially if landlords continue to toughen their stance on CVAs. Most well-planned and structured CVAs should get approval; but landlords are starting to take a tougher stance and there are few levers left for retailers to pull. Securing funding and credit insurance look increasingly problematic."

Top 5 causes

According to EY’s analysis, five key trends are highlighted for the rise in profit warnings. The foremost of these is poor sales which are short of forecasts, something which prompted such a statement from professional services firm Capita in the spring. 36% of warnings were the result of this factor. Delayed or discontinued contracts were also cited in a number of warnings, something which is not out of the ordinary.

Top 5 reasons for profit warnings Q2 2018

A number of profit warnings were triggered by a more surprising factor, however. 14% were connected to adverse weather conditions, with the infamous ‘Beast from the East’ storms said to have offset consumer sentiment and made logistical processes a nightmare, while a sustained heat wave in the UK during the summer looks set to have put more people off attending the high street in the summer months.  

This was followed by two issues, both on 12%. Operational issues, as cited by the likes of GinFestival.com – which failed to convert to an e-commerce platform, costing the company unsustainable sums – were joined by increasing costs and overheads, which are partially at least linked to the flagging value of the pound, making it more difficult to import and export goods for many companies in Britain.

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