UK profit warnings spike amid surging costs

The number of profit warnings issued by UK-listed companies in the first six months of 2022 has risen by 66% compared to the same period one year before. The UK’s historic inflation rates seem to be at the heart of the change, with a record number of companies citing rising costs as the reason behind their warning.

While the ‘post-pandemic’ period was for the best part of the last three years used to suggest that Britain was on the cusp of some disease-free economic boom, things have played out very differently in the months since. While Covid-19 continues to leave a large portion of the workforce unable to work, stagnant wages and massive inflation have drastically reduced consumer spending power. Exacerbated by war in Ukraine, which has driven up the costs of fuel and daily essentials, growth has slowed to a trickle – and with HMRC’s pandemic-era debt recovery well under way, many firms are bracing for the worst.

As a result, new research from EY-Parthenon has found that the number of businesses announcing profit warnings has spiralled in early 2022. A profit warning is a statement issued by a company advising the stock market that profits will be lower than expected. UK-listed companies have put out 136 such warnings in the first half of 2022 – a rise of 66% on the number over the same period in 2021.  

Alan Hudson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, commented, “Companies are facing a myriad of headwinds that will challenge even experienced management teams. 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’.”

Of the problems businesses are facing, the biggest currently seems to be spiralling inflation. EY-Parthenon found that cost and supply chain issues were the most common causes behind profit warnings – though as consumer spending power falls further, that is likely to become even more of a sticking point.

Illustrating this, a record 58% of companies cited rising costs as one of the main reasons behind the warning in the second quarter of 2022 – a rise from the already alarming 43% in the first three months of the year. But half of all the profit warnings issued in the year’s first half came from UK-listed companies in consumer-facing sectors, compared with one-third in the same period last year.

Amber Mace, UK&I Consumer Products & Retail Sector Leader, warned, “Consumers carried record levels of savings, built up over the pandemic, into 2022. This initially supported sales, but rising prices and a gloomier outlook have held back demand and consumer confidence since then. Our recent EY Future Consumer Index found that 37% of low and middle-income consumers are now only purchasing the essentials, compared to 26% in February 2022. 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.”

Reflecting this scaling back on non-essential spending, the FTSE sectors with the highest number of warnings in the second quarter of 2022 were travel and leisure – accounting for eight of them. Having already been devastated by the lockdown months, these sectors were depending on being able to bounce back with returning demand in 2022 – but that has not manifested at anything like the rate needed.

Meanwhile, retailers and drug and grocery Stores both saw seven profit warnings issues. All of these which were significantly affected by rising costs, supply chain issues and staff shortages. In response, firms 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. Should the crisis deepen further, however, it remains to be seen how far scaling back in this way can actually protect bottom-lines.