South East profit warnings more than double in the first half of 2022

The number of profit warnings issued by companies listed in the South East in the first half of 2022 has more than doubled when compared to the same period last year.

This is according to EY Parthenon’s latest Profit Warnings report, which states that 31 profit warnings were issued by the region’s firms in H1 2022, compared to the 14 of H1 2021.

The story is similar nationally, with 136 profit warnings being issued in total, up from 82 in the first half of 2021. A record 58 per cent of these result from rising costs, and over half came from consumer-facing sectors, indicating falling demand and confidence in the market.

Caroline Macaskill, Partner at EY based in Reading 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 companies in the South East, such as FTSE Travel and Leisure and FTSE Personal Care, Drug and Grocery Stores, which have been most affected by rising costs and supply chain issues.

“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’.”

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In the last twelve months, 70 of the 1,222 UK-listed companies have issued at least two consecutive warnings. Considering that, on average, one in five companies delist within a year of their third warning, this could spell further trouble in the future.

On the other hand, the 64 warnings issued in Q2 of 2022 is a slight decrease from Q1’s 72. This is still above the pre-pandemic average, however, and double the 32 warnings issued in Q2 2021.

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.

Nearly half of all FTSE personal care, drug and grocery stores (47%) and 15% of FTSE retailers issued a profit warning in Q2. In retail, the problem is heaviest online, with nearly three-quarters of retailer warnings in H1 2022 coming from stores that operate mostly or exclusively online. Part of this is down to the disproportionate effects of increases in delivery costs.

However, 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.

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.”

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