Profit warnings fall to three year low in 2013 but late spike takes shine off listed businesses’ performance with FTSE 350 bearing the brunt

26 January 2014

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  • Last quarter spike sees 73 warnings – a 30% rise on previous quarter
  • FTSE 350 issued as many profit warnings in the final quarter as in Q4 2008
  • Support service sectors lead profit warnings in 2013 while consumer-facing sectors issue record low number

UK profit warnings fell to a three-year low in 2013 but the year ended with a bitter twist that saw 73 warnings issued in the final quarter – a rise of 30% on the previous quarter – according to EY’s latest Profit Warnings report.

This late spike appears in contrast to improving economic data and UK plc certainly started the second half of 2013 with high hopes. However, late summer tensions in global markets reduced expectations, with downgrades spilling into Q4.
In total, UK quoted companies - Main Market and AIM listed – issued 255 warnings in 2013, compared to 287 in 2012. The FTSE 350 felt the brunt of the headwinds, issuing 31 warnings in Q4 2013, as many profit warnings in the final quarter as in Q4 2008, the height of the financial crisis.

The sectors with the highest number of companies issuing profit warnings in Q4 2013 were FTSE Support Services (14), FTSE Software & Computer Services (7), Aerospace & Defence, Media and Technology Hardware & Equipment (all with 5).

Profit warnings from business services, industrial sectors and companies exposed to volatile natural resources markets and the US shutdown led the way in Q4 and 2013 as a whole. The sectors with the highest proportion of companies issuing profit warnings in 2013 were Aerospace & Defence (55%) and General Industrials (54%).

Improving economy but challenges lie ahead

Keith McGregor, EY’s Capital Transformation Leader for Europe, Middle East, India and Africa, says, “The 30% quarterly rise in UK profit warnings in the final quarter of last year seems incongruous next to improving economic data, but global growth anxieties reduced profit expectations in late summer, with earnings downgrades continuing into the final quarter of 2013

“An improving economic outlook should see profit warnings fall in 2014, although perhaps by less than the pace of recovery might suggest. The year has started with a faster pace of alerts than 2013, with companies still feeling the impact of slower global markets, with the added complication of weaker currency translation as sterling strengthens in anticipation of higher UK interest rates.”

Support service sectors lead profit warnings in 2013

An improving economy and rising activity is no guarantee of falling profit warnings. The number of profit warnings from FTSE Support Services companies stayed within a whisker of 2012’s figure, despite rapidly improving industry surveys. Support Services is the UK’s largest FTSE industry group, but 45 warnings from 37 companies still equates to almost one quarter of the sector warning in 2013.

Alan Hudson, EY’s head of restructuring for UK & Ireland, says, “The FTSE Support Services sector continues to issue a high number of warnings, despite a rapid improvement in industry surveys. Volumes may be increasing, but public and private sector alike are keeping a tight control on costs, resulting in tight margins, intense competition and little room for error for many in the sector.”

Warnings low across consumer-facing sectors

In contrast, the substantial consumer and housing revival kept profit warnings low across consumer-facing sectors in 2013. FTSE General Retailers are particular notable by their absence in the top five sectors warning. In 2011, the sector led the way with 39 warnings, compared with a record low of nine in 2013. 

The FTSE General Retailers sector issued two profit warnings in the final quarter of 2013, with one further warning a piece for the FTSE General Retailers and FTSE Food & Drug Retailers sectors in the first three weeks of 2014. This compares with four warnings from all retail sectors in Q4 2012 and six in Q1 2013. 

Hudson continues, “It was a mixed Christmas for retailers, with a broad spectrum of results.  There were certainly many retailers reporting much-improved sales, who outperformed the market. Overall, sales were up and retail profit warnings dropped back to their lowest Q4 level for four years, albeit helped by weak surveys that dampened market expectations.

“However, trading statements also tell a story of a bruising Christmas for retailers who didn’t get their proposition and strategy right. The winners generally had one or more of three linked elements: they held their nerve on pricing, they balanced bricks and clicks and they hit the ‘value for money’ or brand sweet spot.”

The beginning of the end for monetary stimulus

Concluding, McGregor said, “Overall, it is an improving picture, but with clear challenges ahead for companies in the next stage of the cycle. Monetary stimulus pulled economies back from the brink in 2008–09 and has since smoothed the path to recovery; but persisting with low interest rates creates its own dangers. In this context, the Fed move to taper is small, but symbolic. It marks a shift to a new stage where companies are thinking about how they grow using their own mettle and get ready for the end of cheap and ready credit.

“In the UK, low inflationary pressure should delay monetary tightening to 2015, but the countdown has begun. Central banks have smoothed the path to recovery for many years, but that era is slowly concluding and companies need to be fit for the next stage of the recovery as more options open up for stakeholders.

“The improving outlook also gives stakeholders greater ability to address underperforming assets.  What we are beginning to see is companies thinking about their capital needs and allocation, as well as operational financial fitness.  For those seeking growth, deal and IPO markets are opening up and companies should be looking to take full advantage.”