Winners and losers characterise listed businesses in 2011
2011 proves a tough year for listed businesses as profit warnings jump over 70% - the highest quarterly jump since Q1 2001. General Retailers, Support Services and Software and Computer Services issued the greatest number of warnings in 2011.
London January 22 2012: Profit warnings increased by more than 70% in the final quarter of 2011, which saw the performance of UK listed businesses polarised between those companies which continue to outperform expectations and the perennial underachievers or zombies companies, according to Ernst & Young’s latest Profit Warnings report.
Impacted by economic uncertainty and cut backs on spending from both businesses and consumers, UK quoted companies - Main Market and AIM listed - issued 88 profit warnings in the final quarter of 2011, a quarter-on-quarter increase from 51 in Q3, the highest quarterly jump since Q1 2001.
In total, 206 UK quoted companies issued 278 profit warnings in 2011, compared to 196 in the previous year. The proportion of companies warning was also the highest since 2008 at almost 14%.
FTSE sectors with the greatest number of companies warning in 2011 were General Retailers (39), Support Services (33) Software & Computer Services (31).
UK polarised by stars and zombies
Alan Hudson, head of Ernst & Young’s UK restructuring practice, says, “As evidenced by the sharp jump in the number of warnings, 2011 was a tough year for many companies and this year is likely to continue in the same vein with the gap between the winners and losers widening.
“Many businesses are still expanding profitably, but others – the zombie companies – remain moribund by debt or defunct business models, unable to build value or gain momentum in these challenging economic conditions. Creditor patience cannot last forever and as growth becomes increasingly elusive, we expect further rounds of restructuring in the year ahead.”
Retailers punch drunk from a tough 2011
After two years of relative respite, retail was back on the ropes again in 2011. Companies in the General Retailers sector issued 39 profit warnings in 2011, more than the whole of 2009 and 2010 combined. During last year, 38% of General Retailers warned, the same proportion as 2007 and 18% of all retailers warned in the final three months, a fourth quarter record.
But while it was certainly the listed retail sector’s worst year since 2008; the fight for sales and margin this Christmas contained winners as well as losers.
Hudson adds, “Although consumer facing sectors have been hit hard by sharp fall in disposable income, there are still successful companies across these sectors that have performed well.
“Shoppers are still willing to splash out on items or experiences that they value, but the pressure on consumers’ coffers means if they are spending more to create winners in one area, there will inevitably be losers in others.”
Pain felt across UK plc
While consumer facing companies’ woes have been well trailed, the pain is also being felt across many other sectors.
The Software & Computer Services sector issued 31 profit warnings in 2011, the highest number since 2008 and 40% more than 2010. Over the course of 2011, 20% of the sector issued a profit warning, which is again the highest since 2008.
Most of these profit warnings came in the final quarter of 2011, when Software & Computer Services companies warned twelve times – joint equal with Support Services. A simultaneous leap in the number of profit warnings from both sectors is no coincidence as they have a great deal in common, as Hudson explains.
“Both are highly reliant on the vagaries of spending in their end markets - primarily business and the public sector – and both are therefore highly sensitive to rising levels of uncertainty or falling levels of activity in the broader economy.
“This sensitivity can make both industries useful bellwethers and the sharp rise in profit warnings in both sectors at the end of 2011 was certainly indicative of a changing economic outlook.”
Companies in both IT and support services reported lengthening sales cycles towards the end of 2011, with buyers delaying decisions and attaching additional layers of deal approval in response to economic stagnation and rising levels of uncertainty. Cross-border deals in particular are much more complicated.
What’s in store for 2012?
The final quarter of 2011 saw a large increase in the number of profit warnings and the start of an upward trend that could well continue well into 2012. The significant quarter-on-quarter rise for Q4 was the sharp end of a wide-scale downgrade of economic and profit forecasts.
Rapid revisions in forecasts can lead to a lower number of profit warnings in subsequent quarters, unless there are further shocks. Any future rise in profit warnings could be relatively modest if the crisis in the eurozone moves towards resolution or if input prices fall.
However, a great deal could go wrong in the global economy in 2012. There is still potential for significant setbacks in the eurozone, China’s growth to slow or a fall back in US demand. Moreover, there is still a risk that global unrest – especially in the MENA region (Middle East and North Africa) - could continue to cause pricing and currency fluctuations, which again will put pressure on margins and make forecasting difficult. With these factors in mind, it is a trickier than normal year for UK plc to navigate and make reliable forecasts for the year ahead.
Hudson concludes, “Clearly, the pressure will remain on consumer-facing companies in 2012, but recent high-profile profit warnings have lowered profit expectations. Warnings from consumer sectors may rise in 2012, but not significantly unless there are further major hits to consumer confidence or spending power.
“Profit warnings in the first few weeks of 2012 have come primarily from companies vulnerable to contract and order cancellations, as customers wait for more economic certainty before committing to further significant outlays. Companies in industrial, IT and support services sectors have proved vulnerable to contract delays in the past and further profit warnings are likely from these sectors until the political and economic outlook stabilises.”
Download Profit Warnings Q4 2011 440K, January 2012
