Listed retailers issue more profit warnings in first six months of 2011 than the whole of 2010
64 Profit Warnings issued in second quarter of this year – over 40% more than the same quarter of 2010 London July 2011: The bleak midwinter has merged into a cheerless summer for listed retailers, which have issued 26 profit warnings in the first six months of 2011, more than they issued during the whole of 2010 and almost twice as many as in 2009.
With consumers burdened with rising inflation, increasing debt and diminishing job security, high street spending has been significantly reined in to the point where some segments of the retail sector are seemingly on their knees, according to Ernst & Young’s latest Profit Warnings report.
Listed companies across all sectors saw warnings rise over 40% in Q2 2011, when compared to the same quarter last year, with 64 profit warnings issued. Traditionally the quarter when the number of warnings dips, due to the characteristics of the corporate reporting cycle, Q2 2011 has seen the largest number and proportion of UK quoted companies warning in a second quarter since the peak of 2008.
FTSE sectors with the highest number of profit warnings in the second quarter of this year came from General Retailers with nine, Software & Computer Services with seven and Support Services with five.
Rising input prices remain a significant contributor to profit warnings, with the weak economic environment making it harder for companies to pass on significant rises in raw materials. In the first half of 2011, nearly 30% of warnings cited pricing pressures compared with 15% in the same period last year.
Retail on the ropes
Alan Hudson, partner and head of restructuring at Ernst & Young in the UK, says that it has been a tough first six months of trading for many listed businesses, and it is no surprise that the retail sector continues to suffer.
“The spending boost gained from the long run of spring bank holidays, the fair weather and the Royal Wedding can only provide a temporary fillip to retailers, many of which are burdened with debt, weakened by snow and under stress from years of tough trading.
"The latest figures show that household disposable income is falling 2.7% year on year, with tax rises, benefits cuts and below-inflation wage increases really taking their toll on consumers’ ability to part with their cash at the tills.”
As bad as the dark days of 2008
The benchmark for retail’s darkest days was 2008, and although quoted retailers issued more warnings in numerical terms during this period, the waves of restructuring over the last three years has slimmed the retail sector considerably, cutting the number of listed retailers by 40%.
Hudson explains, “The actual proportion of listed retailers warning is virtually identical in 2011 as it was in the troubled times of 2008, and future prospects don’t appear to be getting brighter. The next three months will stretch more retailers to the limit as they approach the next quarter rent day and seek credit to stock up for Christmas.”
The future for retailers
There is little immediate respite for General Retailers, who will be competing for a smaller slice of the disposable income pie until at least 2013. Added to this, the credit crisis has accelerated changes in behaviour; the consumer is considerably more price-conscious after years of promotional activity and increasingly price savvy, with more online tools enabling price comparisons.
Keith McGregor, Ernst & Young restructuring partner, adds, “Well positioned, well capitalised retailers continue to do well, even in tough environments. However, the end of perpetual year on year increase in high street sales will undoubtedly claim weaker casualties.
“It is important for retailers to adapt their strategies, capital and cost bases now, rather than waiting for trouble. It will be vital to invest in order to capture customer loyalty through improved service and rewards and to ensure the business adapts to changing consumer buying patterns.”
Retail fall out contaminates other sectors
But it is not just the retailers who are having a tough time, sectors reliant on high street performance will be watching the travails of the sector with alarm. UK consumer product manufacturers have faced a rapid escalation in raw material, packaging and energy prices which have been exacerbated by the weak pound.
McGregor adds, “Many suppliers have managed to pass on a good deal of their price increases in 2010-11, helping them to meet profit expectations. However, this pass-through is getting tougher and tougher as the consumer comes under greater strain.
“Anxious to retain cost conscious and stretched consumers, retailers are now asking suppliers for even lower prices and to further increase their promotional activity, refusing to stock brands if producers can’t meet price limits."
Is there a silver lining?
Profit warnings are expected to stay relatively static in the third quarter, barring a further sharp deterioration in growth or credit availability. However, there is still an expectation that profit warnings will increase in the fourth quarter and for the total number of warnings issued in 2011 to be considerably higher than the number issued in 2010.
Hudson concludes, “Profit warnings from consumer-facing companies will lead this increase. The renewed pressure on disposable income in 2011 has already sparked the next round of retail restructuring and taken retail profit warnings back towards their 2008 peak. Below par economic growth is the new normal, particularly for consumer facing industries where adjusting to this new reality is proving a particularly painful process.”
Download Profit Warnings Q2 2011 430K, July 2011
