Profit warnings point to changing balance of the UK economy

23 April 2017

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  • UK quoted companies issued 75 profit warnings in Q1 2017
  • Changing profile of UK profit warnings reflects opportunities and challenges
  • Retail sector warnings hit record low for first quarter, but recent administrations highlight  rising pressures

UK quoted companies issued 75 profit warnings in the first quarter of 2017, two more than the previous quarter and one less than the same period of last year, according to EY’s latest Profit Warnings report.

According to the report, this seemingly stable picture masks falling expectations and significant changes beneath the surface that reflect the UK’s changing economic balance.

The FTSE sectors issuing the most profit warnings in Q1 2017 were: Support Services (11), Travel & Leisure (8), Nonlife Insurance (5) and Software & Computer Services (5).

The report says that profit warnings from industrial and commodity sectors have fallen significantly since the end of 2015, helped by a higher oil price and improving global economy.  But, the impact of a weaker pound and rising pricing pressures loom large. In Q1 2017, 28% of warnings cited rising costs and pressure on prices, compared with 15% in 2016. At the same time, uncertainty increasingly prevails, with 28% of warnings citing contract delays or cancellations – the highest proportion of warnings in more than five years.

Alan Hudson, EY’s head of restructuring for UK & Ireland, comments: “Improving global growth and the positive impact of a weaker pound on exports, combined with falling expectations in stressed areas, should limit the number of profit warnings in the near-term.

“However, increased overheads, political and regulatory change, and digital disruption are piling pressure on sectors with long-standing structural issues, especially in consumer and business services. Periods of rapid change often leave companies behind and the next few years are unlikely to prove an exception.”

Retailers issue record low number of profit warnings for Q1

FTSE General Retailers issued just three profit warnings in Q1 2017 far fewer than usually recorded in the traditional post-Christmas reporting period. With just 6% of the sector warning, this sets a new record low for a first quarter, just below Q1 2010 when 7% of FTSE General Retailers warned.

According to the report, in 2010, as now, retailers beat low profit expectations as consumers benefited from low interest rates, low inflation and low unemployment.

Jessica Clayton, head of retail transaction advisory services at EY, says: “The sector benefited from a surprisingly good end to 2016, helped by last year’s cut in interest rates, low inflation and low unemployment. Expectations had also fallen due to last year’s five-year high in profit warnings and the well-trailed impact of Brexit on disposable incomes.

“Nevertheless, storm clouds are building and many UK retailers are increasingly feeling the squeeze from economic and structural challenges. We’re already seeing some early causalities. The further chipping away of margins from rising costs, when coupled with a drop in consumer spending growth, is likely to lead to further restructurings.”

New challenges for the Travel & Leisure sector

The FTSE Travel & Leisure sector issued eight profit warnings in Q1 2017, its joint highest total in the post-financial crisis era and equal to the number issued in Q2 16 at the time of the EU Referendum. 

Over the last 12 months, half of quoted travel companies have issued profit warnings. Since the UK’s vote to leave the EU, 36% of quoted travel company warnings have cited the impact of Brexit or adverse exchange rates, according to the report.

Alan Hudson, continues: “Consumers are still booking holidays and flights in significant numbers, but the trading environment has changed dramatically. Outbound travel companies are feeling economic, geopolitical and regulatory challenges most keenly. But, pressure is also building in leisure sectors, especially those most exposed to rising labour costs and uncertainties.

“Margin pressure seems to becoming especially acute for airlines, where intense rivalry on some routes is pushing down on prices and low oil prices have only sharpened competition further.”