The number of profit warnings issued by listed companies in the Midlands in the first six months of 2022 increased 23% when compared to the same period in 2021, with the majority of warnings prompted by rising costs, according to EY-Parthenon’s latest Profit Warnings report.
In total, 16 profit warnings were issued by Midlands-listed companies, up from 13 issued in H1 2021. Nine warnings were issued in Q2 2022, with seven citing rising costs or supply chain issues as the reason behind the warning.
Nationally, the report reveals that 136 profit warnings were issued by UK-listed companies in H1 2022, up 66% from 82 in the first six months of 2021 with a record number of companies citing rising costs as the reason behind their warning. In the second quarter of 2022, 64 warnings were issued, down slightly from the 72 issued in Q1 but still 10% above the pre-pandemic average and double the 32 warnings issued in Q2 2021.
Rising costs and labour market issues behind recent profit warnings
Of the warnings issued in Q2 2022, a record 58% of companies cited rising costs as one of the main reasons behind the warning, up from 43% in Q1, while 19% noted labour market issues. In total, of the 1,222 UK-listed companies, 70 have issued at least two consecutive warnings in the last twelve months. On average, one-in-five companies delist within a year of their third warning, most due to insolvency.
Sectors with the highest and lowest volume of warnings
The FTSE sectors with the highest number of warnings in Q2 2022 were Travel and Leisure (eight), Retailers (seven), and Personal Care, Drug and Grocery Stores (seven) – all of which have been significantly affected by rising costs, supply chain issues and staff shortages.
Despite also contending with an increase in cost, labour, and supply chain stresses, FTSE Construction and Material companies issued just three profit warnings in H1 2022, with many larger companies able to absorb or pass on price increases and leverage their buying power to avoid material shortages.
Dan Hurd, partner at EY-Parthenon in the Midlands, said: “Companies are facing a myriad of headwinds that will challenge even experienced management teams. In Q2 2022 we moved into yet more uncharted territory as inflation and interest rates reached multi-year highs while consumer confidence fell to record lows – all against a backdrop of geopolitical tension.
“Over the first half of this year, we have seen profit warnings prompted primarily by cost and supply chain issues, but as we start to see a fall in consumer demand and confidence, it is likely that other underlying stresses will become exposed.
“Reflecting the national picture, it has predominantly been consumer-facing listed companies in the Midlands, such as retailers, which have been most affected by rising costs and supply chain issues in the first half of the year. However, we are also seeing manufacturing companies in the region continuing to be affected by ongoing supply chain disruption, as well as rising energy prices.
“Businesses will need to prepare for lower growth, tighter capital and significant market volatility in the coming months. As profit warnings and stress levels rise, we’re starting to see more companies issue multiple profit warnings and a return of companies approaching the ‘three warning rule’.”
Falling confidence impacts consumer sectors
Half of all the profit warnings issued in H1 2022 by UK-listed companies came from consumer-facing sectors, compared with a third in H1 2021. At a sector level, it is notable that nearly half of all FTSE Personal Care, Drug and Grocery Stores (47%) and 15% of FTSE Retailers issued a profit warning in Q2.
Three-quarters of the FTSE Retailers that issued a warning in the first half of 2022 came from companies which operate exclusively or mostly online. These companies have been particularly affected by the shift in sales back to ‘bricks and mortar’ stores and were disproportionately affected by increasing delivery costs and product returns.
Amber Mace, UK&I consumer products & retail sector leader, said: “Consumers carried record levels of savings, built up over the pandemic, into 2022. This initially supported sales, but rising prices and a gloomier outlook have held back demand and consumer confidence since then.
“Our recent EY Future Consumer Index found that 37% of low- and middle-income consumers are now only purchasing the essentials, compared to 26% in February 2022. The data underlines the significant difficulty companies face when trying to pass price increases on to consumers who are reducing their spending levels, which, in turn, is creating tensions along the supply chain and leading to high levels of unsold stock.
“Companies which are managing to weather the storm are those which have a strong focus on demand optimisation and are responding to the needs of their customers by providing value for money and sustainable options. They are also developing robust plans to manage cost inflation and have strong processes in place around cash management and inventory visibility to minimise costly write-offs.”
Credit reform could affect consumer spending
FTSE Finance and Credit Services companies issued seven profit warnings in H1 2022. Removing the unprecedented and far-outlying pandemic-affected year of 2020 from the analysis, this is the sector’s highest first-half total for profit warnings since 2009, just after the global financial crisis. In addition to contending with challenging market conditions, the consumer finance sector is under continued regulatory scrutiny.
These challenges will be further exacerbated as pressure builds on consumer finances, and the FCA is setting increasingly clear expectations of how it expects firms to help consumers in difficulty. At the same time the Bank of England has recognised that if firms tighten their lending criteria too quickly, this may have an adverse economic impact.
Dan Hurd said: “A smaller, more regulated, and more risk-adverse sector could lower lending levels – especially in riskier areas. This has implications for consumer spending, particularly for retailers that rely on credit-based purchases.
“Credit providers in the best position will be those that have restructured, created a solid balance sheet, and invested in a technology platform on which to base their lending and weather any storms ahead.”
