High level of retail profit warnings ‘a worrying omen’
16 April 2018
- UK quoted companies issued 73 profit warnings in Q1 2018
- Number of FTSE General Retailers warnings hit a seven-year high
- A fifth of FTSE Travel & Leisure companies have warned in the year-to-date with most warnings in the Restaurants & Bars sub-sector
LONDON, 15 April 2018 – UK quoted companies issued 73 profit warnings in Q1 2018, two fewer than the same quarter of 2017 and 10% less than the previous quarter. However, this masks one of the toughest quarters on the UK’s high street, with warnings from the sector hitting a seven-year high, according to EY’s latest Profit Warnings report.
According to the report, 13 profit warnings from almost a fifth (18%) of companies in the FTSE General Retailers sector in Q1 2018 points to the sector feeling the full force of the adverse headwinds battering the high street. In the year to date, 41% of FTSE General Retailers have issued a profit warning, the report says.
The FTSE sectors issuing the most profit warnings in Q1 2018 were General Retailers (13), Support Services (10), Software & Computer Services (6), and Travel & Leisure (5). Cost and competitive pressures remain high on the agenda, cited in 32% of warnings, including over half of FTSE General Retailers and all three FTSE Household Goods warnings. Ten warnings cited adverse exchange rates in Q1 2018, a post-EU Referendum high. Sterling has regained some ground, but its weakness still has bite as companies adapt to new currency hedging arrangements.
The report says that the median share price drop on the day of warning rose once again to 15.8% in Q1 2018, the highest since Q2 2016.
Alan Hudson, EY’s head of restructuring for UK & Ireland, comments: “The exceptionally high number of retail profit warnings is a worrying omen. Cyclical and structural pressures are once again colliding to reshape the UK’s high street. There is still growth at home and especially abroad, however, 2018 is unquestionably a less benign year for many UK companies exposed to the UK consumer economy.
“A less forgiving investor reaction to profit warnings reflects increased market volatility and more fundamental concerns as technology and changing consumer behaviour disrupts many sectors. Where the structural challenge is greatest, we expect to see sharper divides emerge between those who have grasped new realities and those left behind in the old economy.”
FTSE Travel & Leisure sector feels the pinch
The FTSE Travel & Leisure sector issued its highest number of profit warnings since the financial crisis in 2017, with the pace remaining high into 2018, according to the report. With five warnings issued in Q1 2018, just over a fifth of the sector has warned in the year-to-date with most warnings coming from restaurants and bars.
Alan Hudson, continues: “The restaurant sector faces a perfect storm of declining consumer spending, an exceptionally crowded market place, especially in casual dining, as well as rising costs in food and labour. The loss of margin to online delivery further compounds the squeeze.
“Some companies are weathering the storm well. But, those with high operating and financial leverage are struggling to match their investment cases and service their debts. Troubled companies also face a lack of viable turnaround options.
Discounting can drive volumes, but there is little margin left to give away and a voucher culture has lowered price expectations in a similar manner to retail.”
More to see in 2018
Alan Hudson, concludes: “Increasing volatility usually tightens financing conditions. For now, lending markets remain broadly supportive, but it is getting noticeably harder for weaker companies in pressurised sectors to raise finance and refinance existing debt. The gap between companies that have adapted to the new economy and those left behind will grow as the pace of change accelerates. Stronger companies with access to capital to invest in their own businesses and to make strategic acquisitions and alliances will find themselves in an increasingly advantageous position.”