Economic uncertainty and lower consumer spending blamed for big rise in profit warnings

July 20, 2023

Profit warnings from South West companies listed on the London Stock Exchange soared by 66% in the first half of this year as the cost of living crisis hit consumers.

According to new research by international accountancy group EY, 15 warnings were issued by quoted firms in the region during the six months – two thirds up on the same period last year.

Almost half of these came from firms in the consumer goods sector as they alerted shareholders to the impact on their bottom line of pressure from supply chain headwinds and a fall in consumer spending.

The figures emerge from the latest EY-Parthenon Profit Warnings report, which also shows that the 66 warnings issued nationally between April and June marked the highest second quarter total in three years.

EY-Parthenon South West Partner in turnaround and restructuring strategy Lucy Winterborne, pictured, said: “Businesses across the South West and around the country have faced challenging conditions across the first half of the year due to persistent economic uncertainty, lower consumer spending and rising interest rates.

“Conditions may remain challenging for some time to come. However, an increasing number of businesses are forecasting some level of growth this year as overheads such as energy costs gradually fall.”

She said businesses that took action early to reshape and restructure would see a level of protection from high inflation rates.

“[But] those that haven’t made changes will likely find it hard to navigate the next few months of economic uncertainty and turbulence,” she added.

The report also shows that warnings from listed companies rose year-on-year for the seventh quarter in a row – the longest run of consecutive quarterly increases since 2008.

The highest number of second-quarter warnings recorded by EY-Parthenon was in 2020, when 166 were issued.

The report also said persistent inflation and rising interest rates had played a significant role in the second quarter’s warnings, driving a tighter and more expensive lending environment.

Changing credit conditions were cited in one-in-five profit warnings during the period, the highest proportion since quarter two of 2008 and up from one-in-10 in the first three months last year.

EY-Parthenon partner and UK&I turnaround and restructuring strategy leader Jo Robinson said: “The sustained rise in profit warnings over the last two years reflects the extraordinary mix of challenges faced by UK businesses over that timeframe.

“It’s now clear that the effects of these low-growth conditions are spreading to nearly all corners of the UK economy, and this quarter we’ve seen earnings pressure extend up the value chain into the mid-market.

“Rising interest rates have significantly changed credit conditions for companies that need to refinance, and businesses have started to feel the effect of a more expensive borrowing environment, especially in sectors where credit availability has been a key driver of activity.”

She said the number of businesses that had previously locked in low interest rates had postponed some of the challenges, but not indefinitely.

“We’ll likely see credit cost and availability play an increasingly significant role in restructuring activity as more businesses encounter a markedly different refinancing landscape,” she added.

“Insolvency activity typically peaks nine to 12 months after a profit warning peak. Conditions are likely to remain challenging and those businesses best placed to persevere will be those that can reshape their operations to withstand further shocks and capitalise on growth.”

Firms in the construction and materials sector accounted for 10% of the second quarter’s profit warnings owing to the national housing market slowdown, while warnings from industrial sector businesses rose by 40% year-on-year as wavering business confidence led to spending delays and cost cutting.

Retailers fared better, issuing 10 warnings in the first half – a fall from the 16 in the same period last year.

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