UK profit warnings continue to rise year-on-year

Profit warnings from UK-listed companies are still rising year-on-year, and remain above average for fifth consecutive quarter. New research suggests that things are unlikely to improve quickly, with shareholder panic still gripping keystone markets including technology and the retail sector.

2022 was a far cry from the economic boom many experts forecast. Covid-19 continued to leave a large portion of the workforce unable to work, while stagnant wages and massive inflation drastically reduced consumer spending power. At the same time, HMRC beginning to claw back lockdown era loans left many firms overstretched financially.

By the end of the 2022, the number of UK firms issuing profit warnings increased by 50% year-on-year. Now, a new study from EY-Parthenon suggests that worse may still be to come.

The strategy consultancy found that 75 profit warnings were issued by UK-listed companies in the first quarter of 2023. Not only was this a rise on the 72 profit warnings in the same period of 2022, it was the highest first quarter number since the start of the pandemic.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, commented, “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.”

Of the pressures striking firms, consumer confidence is now still the leading cause of profit warnings in the UK. In comparison, increasing costs and overheads had dramatically fallen as a cause. This reflects the complexity of Britain’s economic predicament, which is inadequately summarised by simply suggesting ‘inflation is falling’. While inflation overall tracked down – though not by much – to 10.1% in the first quarter, prices grocery prices rocketed.

This is reflected by the volatility of shareholders’ reactions to economic news. While industrial and financial services players experience lower volatility, the rate of share price reaction for many consumer-facing sections of the economy is now higher than in the 2008 crisis.

‘Discretionary’ consumer spending in particular is seeing price volatility of around 10% more than during that historic financial collapse – with investors aware that shoppers are less and less able to commit to ‘non-essential’ spending. This was also reflected in the technology sector – worryingly for the UK government, which spent the duration of the Brexit process trying to re-invent the country as a global technology hub – which is seeing 5% more volatility.

Will Fisher, EY UK Strategy and Transactions TMT Leader, added, “Significant disruption and uncertainty, particularly in consumer facing markets, is having a knock-on effect on the TMT sector as businesses revaluate their cost bases and delay purchasing decisions. The result is short-term revenue growth challenges for TMT companies, many of which are also trying to prioritise profitability and cash flow as they face a tighter and more expensive lending environment.”