Number of profit warnings edges up as uncertainty bites

30 October 2016

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  • UK quoted companies issued 68 profit warnings in Q3 2016
  • Almost a third of companies have cited Brexit as a contributing factor 
  • UK quoted retailers issued nine profit warnings – the highest third quarter total since 2008

UK quoted companies issued 68 profit warnings in Q3 2016, two more than the previous quarter, but 11 fewer than the same period in 2015, according to EY’s latest Profit Warnings report.

Brexit led the reasons for warning in the quarter, with 20 profit warnings citing the fallout from the vote. Nevertheless, the initial Brexit impact has been mixed and the negative effects have been focused on sectors most exposed to business uncertainty and the weaker pound. The FTSE sectors with the most Brexit-related warnings so far in 2016 are: Support Services (6), Travel & Leisure (4) and Real Estate Investment & Services (4).

Most companies also blamed other factors, including falling sales and difficult conditions in their own sector. Overall, the FTSE sectors leading profit warnings in Q3 2016 were: Support Services (12), General Retailers (6), Travel & Leisure (5), Household Goods (5) and Industrial Engineering (5).

The median share price fall on the day of warning fell back from the peak of 16.6% in Q2 to 9.5% in Q3, just below its pre-Brexit level.  Although, this figure rose to 13% in September as investors returned after the summer lull.

Alan Hudson, EY’s head of restructuring for UK & Ireland, comments: “Companies are contending with a daunting level of uncertainty. Last summer it was the falling oil price and worries about growth and US interest rates that dominated. This summer it was the fallout from Brexit. Meanwhile, companies are still facing competitive and disruptive forces in their own markets.

“The profit warnings that cited Brexit over the summer quarter were mostly in exposed pockets. For most companies it has been business as usual and for some, the falling pound has been a help rather than hindrance. But the picture will change again as we start to see broader economic effects come through.”

Retailers in the crosshairs of rising costs and price pressures

UK quoted retailers issued nine profit warnings in the third quarter of 2016, the highest total since the end of 2011 and the highest third quarter total since 2008.  Retail sales might be rising, but EY’s data shows how the pressure on margins remains relentless and leaves companies vulnerable to further shocks.

Adverse weather conditions, pricing and competitive pressures continue to dominate UK retailers’ reasons for warning alongside the need for additional investment required to keep digital pace with their rivals.

Jessica Clayton, head of retail restructuring at EY, says: “Although Brexit wasn’t the main driver for profit warnings this summer, its secondary effects have the potential to tighten the margin vice even further as we move into 2017.  It’s this pressure on retailers’ margins that leaves them vulnerable to shocks like adverse weather conditions - and Brexit’s economic fallout looks set to tighten the vice even further. The impact of weakened sterling may be delayed by currency hedges, but at some point something will have to give at the till – or further down the supply chain.”

Outsourcers are feeling the pressure

FTSE Support Services companies issued a further 12 profit warnings in the third quarter of 2016. This takes the total number of companies warning in the last year to 38, or 27% of the sector – well above the average of 18%.

All of these third quarter profit warnings came from companies in Business Support Services sub-segment, which covers a wide range of non-financial services to the private and public sector - including outsourced services. The report says this is a reflection of post-Brexit uncertainty and existing margin and contract pressures faced by outsourcers from business and government.

Lee Watson, Restructuring Partner at EY, says: “Contract issues – slips, delays and cancellations – are a perpetual problem for the sector and feature in a quarter of Business Support Services profit warnings in the last 12 months. They’ve also been the catalyst for significant reputational damage, as we’ve seen in a number of high profile cases. Public sector contracts in particular have attracted high levels of scrutiny given their high profile position in the public domain and ongoing scrutiny of government spending.”

Challenge and opportunity beyond Brexit
Alan Hudson concludes: “Sluggish, disrupted and competitive markets don’t provide companies with the luxury of standing still – whatever the outlook. Companies will need to remain agile in their operations and capital structures to ensure they are resilient in the face of new challenges – and to grasp opportunities.”