Over a third (36%) of UK-listed companies in consumer sectors issued a profit warning during the year
While consumer-facing sectors continued to be most affected, stress is now deepening across all sectors
The number of profit warnings issued by UK-listed companies in 2022 increased by 50% year-on-year, with record levels of warnings citing rising costs, according to EY-Parthenon’s latest Profit Warnings report.
In total, 305 profit warnings were issued in 2022, an increase of 102 from 2021 when 203 warnings were issued. Half (152) of the warnings issued in 2022 were due to rising costs – double the share in 2021. During the year, 17.7% of the UK’s 1,193 listed businesses issued a profit warning, equal to the proportion of companies that issued warnings during the global financial crisis in 2008.
In the second half of 2022, 169 warnings were issued, which is the highest second-half total since 2015. In Q4 2022, 83 profit warnings were issued, 41% of which cited rising costs, while 24% were due to delayed or cancelled contracts, and 20% due to weaker consumer confidence.
FTSE Retailers issued the highest number of warnings (36) in 2022 followed by FTSE Travel and Leisure (25), FTSE Software and Computer Services (18), FTSE Industrial Support Services (17) and FTSE Personal Care, Drug and Grocery Stores (16).
In 2022, 31 listed companies issued their third consecutive profit warning in 12 months, compared to 23 in 2021. Of those warning for a third time in 2022, 13% have already gone through a restructuring process, 19% have breached covenants, and 35% have changed CEO or CFO as of mid-January 2023.
Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, said: “2022 was a challenging year for UK companies with rising operational costs, changing consumer behaviour, and the cost-of-living crisis having an acute impact on consumer-facing sectors. We are now seeing stress deepen and spread into other areas of the economy, such as industrial sectors, which saw the biggest rise in warnings in Q4. Cost pressures are passing through supply chains, business confidence is weak, and credit markets are tightening. The latter factor prompted more profit warnings in Q4 2022 than in any period since 2009.”
“Forecasting and planning will remain challenging in 2023, with the latest EY ITEM Club Winter Forecast warning the UK is set for a deeper recession than previously thought. For many management teams it will be the first time they have contended with this extent and complexity of challenges. Companies need to ensure they are scenario planning and have a clear understanding of how their business will adapt under different conditions, particularly as accessing capital to plug funding gaps is becoming harder.”
Consumer sectors dominated profit warnings in 2022
Over a third (36%) of UK-listed companies in consumer-facing sectors issued a profit warning in 2022, up from a fifth of companies warning in 2021. This included 48% of FTSE Retailers, 60% of FTSE Personal Care, Drug and Grocery Stores companies, and 30% of FTSE Food Producers. Increasing costs featured in 63% of consumer sector warnings, with 33% citing falling consumer confidence, 22% supply chain problems, and 20% labour market issues.
Sam Woodward, Turnaround and Restructuring Strategy Partner at EY, commented: “Although festive trading was better than expected for many businesses, the bar was set low by exceptional levels of consumer sector profit warnings in 2022. The ‘golden quarter’, a vital period for consumer companies, included a winter World Cup along with the disruption from train and postal strikes. This backdrop created a further complex layer of challenges and opportunities in addition to ongoing cost, labour, inventory, and confidence issues for consumer-facing companies.
“Supermarkets appear to have been the main winners of Christmas 2022, while many omnichannel retailers managed to flex their offering to adapt to the impact of industrial action and performed well. However, as EY’s latest Future Consumer Index underlines, it will be critical for companies to keep adapting and reflecting customer priorities, which for most consumers in the short-term, will be a compelling price proposition.”
Meanwhile, warnings from FTSE Food Producers reached a 16-year high in 2022, most caused by the increasing challenge of passing on price increases. The sector, which has faced unprecedented supply chain and inflationary pressures, is now dealing with mounting financial pressure.
Sam Woodward added: “The challenges for food producers don’t look set to ease significantly in 2023. Although energy prices have fallen back from their 2022 peak, they remain historically high and ingredient prices and supply problems still affect the sector. Although food is one of the most resilient areas of consumer spending, it’s not immune to corporate distress, especially in discretionary categories. It is vital that companies focus their efforts on products that match consumers’ new priorities and look at holistic cost reduction to address input and labour cost issues.”