Sunday, May 22, 2022

Record number of listed companies cite supply chain and rising costs in profit warnings in 2021

The number of profit warnings issued by East Midlands-based listed companies decreased by 45% in 2021 compared to 2020, although supply chain disruptions and rising costs are set to continue to challenge businesses in the region, according to EY-Parthenon’s latest Profit Warnings report.

In total, East Midlands listed businesses issued 17 profit warnings in 2021, compared to 31 in 2020, with a 40% decrease in warnings issued in Q4 2021, compared to Q3.

Nationally, however, profit warnings issued by UK listed companies increased by 19% year-on-year in Q4 2021. In the final quarter of 2021, UK listed companies issued 70 warnings, up 19 from the 51 issued in Q3, with a record 44% blaming supply chain disruption (compared to just 2% between 2009 and 2019), and a further 27% citing rising cost pressures.

In total, 203 profit warnings were issued in 2021, down from the record-breaking 583 warnings witnessed in 2020 and the second lowest by number since EY began tracking warnings in 1999. The low total is due to the strong post-lockdown rebound and exceptionally low levels of profit warnings in the first half of the year, which gave way to extensive supply chain disruption and rising costs in the second.

Dan Hurd, EY Parthenon UK&I Turnaround and Restructuring in the Midlands, said: “Sporadic growth made it a difficult year for many companies to navigate, despite healthy headline figures. By the second half of the year, an increasing number of companies nationwide were issuing profit warnings as forecasting and earnings challenges evolved and multiplied.

“After a challenging time in 2020, listed businesses located in the East Midlands saw a reduction in the number of profit warnings issued. The retail, construction and materials, and industrial support services sectors continued to be among the most severely affected by the global pandemic and Brexit uncertainty.

“Regional business faced new challenges, including supply chain disruptions and changes to labour market conditions. These affected business resilience and investor decision-making throughout the year, albeit at a lesser rate than 2020’s challenges.

“In the next 12 months, businesses may choose to continue to delay and alter their investment decisions and preserve cash. They could also look again at internal structures and further business transformation projects.”

EY-Parthenon’s report found that one-in-five listed consumer-facing companies issued a warning over the last year. The most affected sectors were FTSE Aerospace & Defense with 57% of companies issuing a warning in 2021, followed by FTSE Personal Care, Drug & Grocery Stores (39%) and FTSE Retailers (34%), all of which were all affected by supply chain headwinds in the second half of the year.

However, not all profit warnings were due to supply chain issues. The FTSE Software & Computer Services sector issued 11 warnings in H2, the joint highest for any sector along with FTSE Retailers.

Dan Hurd continued: “Nationally, the biggest driver of warnings in 2022 is likely to be the rise in inflationary pressures and its impact on disposable incomes and margins. We have already recorded profit warnings relating to rising energy prices. Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare – including care homes.”

He added: “We expect to see more restructuring activity in 2022 as the last government support measures fall away and businesses feel the full force of, not only economic and structural pressures, but the increasing focus on Environmental, Social, and Governance (ESG) metrics, as funders increase their focus on supporting ‘sustainable’ businesses. The ability to demonstrate purpose and long-term value has never been so vital.”

Retail sales rebound but challenges ahead

The reopening of the economy post-lockdown led to a rebound in sales for FTSE Retailers but also created significant cost and supply chain issues in the run up to Christmas. In what is traditionally known as the ‘golden quarter’, all seven FTSE Retailers’ warnings cited these pressures. In total, 34% of FTSE Retailers issued a warning in 2021 (21 warnings in total) with over 70% of sector warnings in H2 2021 coming from online retailers.

Despite this, most retailers still experienced a successful Christmas trading period – data from the British Retail Consortium shows that non-food sales in December 2021 were 2.2% higher than 2019. However, the predicted consumer income squeeze in 2022, the rebalancing of spending from goods back to services, and the constant need to adapt to changing consumer behaviour will pose new challenges.

Silvia Rindone, EY UK&I Retail Lead, said: “Whilst supply chain issues are likely to continue this year, the biggest unknown for the retail sector in 2022 is how much consumers will spend and what they’ll spend it on. EY’s latest Future Consumer Index, which has been tracking consumer behaviour since the start of the pandemic, revealed the increasing desire of consumers to find a balance between sustainability and affordability. Consumers now rank planet and cost equally in terms of priority. These factors combined will make 2022 a tough year to navigate. To be successful, retailers will need clear strategic direction paired with strong operational and financial agility.”

Silvia added: “We have yet to see any major wave of retail restructurings, but there are certainly retailers that would have failed in the last two years without government assistance – even in the absence of COVID-19. The end of the rent moratorium in March removes the final layer of government support and it will be interesting to see how the arbitration process plays out – and how other stakeholders react to any increase in sector distress.”

Elsewhere, travel and hospitality sectors faced another challenging year, starting with a lockdown and ending with the Covid-19 Omicron variant. The hospitality sector also faced continued staffing problems, compounded by Brexit’s impact on the labour market. However, despite these challenges, just 16% of FTSE Travel & Leisure companies issued a warning in 2021 reflecting the positive impact of government support, as well as the sector’s management of its operations and investor expectations.

Looking ahead, pent-up demand for summer holidays together with record levels of personal savings make for a positive outlook for the sector. However, pressure on consumer incomes, the slower return of international business travel and the impact of cost rises could hinder the sector’s recovery in 2022.

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