Better than expected end to 2016 for profit warnings could be the calm before the storm

29 January 2017

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  • UK quoted companies issued 73 profit warnings in Q4 2016
  • Level of warnings reflects the mixed impact of the Brexit vote
  • Retailers issued the most warnings for five years in 2016, despite rising sales

UK quoted companies issued 73 profit warnings in Q4 2016, five more than the previous quarter, but 27 fewer than Q4 2015, when warnings spiked following the fall of the oil price, according to EY’s latest Profit Warnings report.

According to the report, the number of profit warnings reflects relative stability in both the UK and global economy in the second half of 2016, with UK consumer spending in particular defying expectations.

The FTSE sectors issuing the most profit warnings in Q4 2016 were: Support Services (17), General Retailers (7), General Financial (5) and Construction & Materials (4).

Behind the headlines, however, the report says that there are less positive signals. A record level of FTSE Support Services warnings in 2016 suggests that businesses are starting to react to uncertainty, as does the 27% of warnings citing contract delays or cancellations in the final quarter. Companies exposed to the weak pound are also reporting increasing pressure on earnings, with 11% of warnings citing adverse exchange rates.

Alan Hudson, EY’s head of restructuring for UK & Ireland, comments: “A strong end to 2016, represents the calm before the storm. The headline numbers show the UK economy weathering the initial impact of the Brexit vote remarkably well. But, we expect 2017 to be a very different year and for many companies a much tougher one.

“There is a gap between winners and losers, one which in many cases predates the Brexit vote and stems from ongoing structural weaknesses that will leave companies exposed to the significant changes and new challenges that lie ahead. Companies can’t take much for granted in this period of challenge to the political and economic consensus, but neither can they afford to be paralysed in the face of rapid change.” 

Rising levels of multiple profit warnings illustrate the diverging fortunes of UK plc. The report shows that in Q4 2016, 49% of companies warned for the second, third or even fourth time in the last year – compared with 37% issuing multiple warnings in the same quarter of 2015.

Retailers issue record number of profit warnings

Retailers issued seven profit warnings in the last quarter of 2016, with all the warnings coming from FTSE General Retailers and no warnings issued by FTSE Food & Drug retailers.

Over the course of 2016, quoted retailers issued the most warnings for five years, despite rising sales. But this is an increasingly divided sector. The number of warnings rose by over a quarter year-on-year, but the number of companies issuing warnings fell. Overall, 32 warnings were issued by 15 companies in 2016, compared to 23 warnings from 21 companies in 2015.

Jessica Clayton, head of retail transaction advisory services at EY, says: “Consumers kept on spending, but the margin vice has not loosened its grip and the fallout from the Brexit vote, while not universally negative, has twisted the handle another notch.  We expect the economic and sector challenges of the next twelve months to increasingly expose weaknesses as rising costs and higher inflation put retailers’ margins and consumers’ incomes under greater pressure.”

Rising costs expose construction sector vulnerabilities

Four FTSE Construction & Materials companies issued profit warnings in Q4 2016, the highest quarterly total for two years - and as many that warned in the whole of 2016.

The report says that the sector remains structurally vulnerable to falling confidence and rising prices.  There were eight warnings issued by the sector in 2016 with half of the warnings citing the impact of increasing costs. We expect this to continue, exacerbated by a weak pound and ongoing skill shortages.

Alan Hudson continues: “The construction sector is vulnerable to rising costs and falling confidence, so it’s no wonder that it now finds itself in the spotlight. The prospect of increased infrastructure spending and global growth have tempered market concern. But in this diverse industry, there are invariably companies that don’t have exposure to growth sectors, while adverse moves in demand and pricing will expose existing vulnerabilities.”