UK companies issue highest number of second quarter profit warnings since 2008

24 July 2016

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  • UK quoted companies issued 66 profit warnings in Q2 2016
  • In the twelve months to the end of Q2 2016, 17.6% of UK quoted companies issued profit warnings
  • 11% of profits warnings issued relate to the EU referendum

UK quoted companies have issued the highest number of profit warnings in a second quarter since 2008, according to EY’s latest Profit Warnings report.  UK quoted companies issued 66 profit warnings during the second quarter of this year – nine more than in the same period in 2015.

Slower than expected sales continues to trigger most UK profit warnings. However, 11% of the profit warnings in Q2 relate to the EU referendum, with companies primarily citing the impact of uncertainty on demand and the weaker pound.

There have been 321 warnings in the year-to-date from 17.6% of UK quoted companies compared to 297 warnings from 16.6% of companies at the same point in 2015. The FTSE sectors leading profit warnings in Q2 were: Support Services (14), Travel & Leisure (8), General Retailers (7) and Media (6).

Brexit only part of underlying weakness

Alan Hudson, EY’s head of restructuring for UK & Ireland, comments: “It’s been a dizzying unpredictable time since the EU referendum. The initial impact of this uncertainty appears to have pushed profit warnings to their highest second quarter total since 2008.

“But, ultimately it’s hard to separate the Brexit effect from the underlying issues that brought high levels of warnings in previous quarters. Many UK companies still face sluggish, disrupted and competitive markets, with Brexit adding further layers of challenge, but also opportunity.”

Retailers brace for challenging times

UK quoted retailers issued eight profit warnings in the second quarter of 2016, the highest second quarter total in five years and three more than the same quarter of 2015. The sector has been under pressure for some time, squeezed in a margin vice of deflation, higher wages and the increasing requirement to invest in stores and digital infrastructure – mentioned in a third of profit warnings in the first half of 2016.

Christian Mole, Transaction Advisory Services executive director at EY and retail specialist, says: “Most of these warnings came before the Brexit vote, which undoubtedly adds a further layer of complication. The most immediate risk is that uncertainty hits employment and increases inflation, putting pressure on consumer confidence and spending.

“Looking beyond the current uncertainty, retailers will be considering the potential impact of Brexit on their labour force, especially within distribution and logistics, where there are a significant number of EU employees. Given the continuing structural change in the sector, it’s also vital that retailers don’t take their eye off the day-to-day challenges too.

“The weak pound does, however, offer a silver lining for any retailers who benefit from currency translation from overseas sales and those stand to benefit from the likely increase in overseas visitors.”

Travel industry flies low

FTSE Travel & Leisure companies issued eight profit warnings in the second quarter of 2016.  In total, a quarter of the sector has warned in the year-to-date – with these warnings heavily weighted towards the travel sector, where 40% of companies have warned.

Amanda Blackhall O’Sullivan, Restructuring Partner at EY and travel sector expert, comments: “The sector has shown remarkable resilience in the past, with the family holiday remaining a priority even when disposable incomes have fallen. However, the landscape has changed considerably for travel companies in recent years. Consumers are still booking holidays in significant numbers, but geopolitical upheaval has stopped or significantly reduced sales to what used to be popular destinations. Travel companies with a broad geographical profile have been able to absorb this shift, but smaller companies heavily exposed to these destinations have suffered. 

“The weak pound also presents a further challenge for outbound travel companies – especially airlines. Although again, there is a potential upside for inbound and domestic travel and leisure businesses, who will also hope to benefit from greater numbers of overseas visitors and UK holidaymakers.”

Upheaval and transformation become the norm

Alan Hudson concludes: “Brexit will disrupt company operations and business models; but this is part of a bigger disrupted picture and the need to adapt, innovate and capture limited growth in constantly changing markets continues unabated.

“Companies will need an integrated response to help them navigate their way through this period of immense change. The winners will be those that demonstrate clear thinking about their priorities, build in resilience to cushion the knocks and ensure that they can take advantage of opportunities. It’s all change again, but upheaval and transformation are becoming the norm.”