South East: Profit warnings reflect uncertain outlook, says EY

In the nine months to the end of September, UK quoted companies issued 235 profit warnings, the highest year to date total since 2008 (323), according to EY’s latest Profit Warnings Report.

In the South East, profit warnings remained stable year-on-year. So far in 2019, EY recorded 43 warnings in the region, equal to the number issued in the same period (Jan – September) last year. In quarter three 2019, 12 profit warnings were issued by South East-based plcs – the same number as quarter three 2018.

Neil Hutt, partner in EY’s Transaction Advisory team in the South East, said: “It is positive to see profit warning levels remain stable in the region, when comparing this year to 2018. However, an uncertain economic outlook will continue to affect the decision-making and demands of UK businesses and households, driving profit warnings in the remaining weeks of 2019.”

UK profit warning eight-year high

In Q3 of 2019 EY recorded 77 profit warnings from UK listed businesses, up from 69 in the previous quarter (Q2 2019) and 13% higher than Q3 2018 (68). Just over a third of profit warnings issued in Q3 2019, explicitly cited the impact of macro-economic volatility, with a further 30% blaming contract delays or cancellations.

Hutt added: “This summer, in addition to domestic concerns, UK businesses have felt the growing impact of escalating political and trade tensions in the global economy. The negative effect of protracted and widespread uncertainty is evident, with warnings becoming more widespread across all FTSE sectors.

“Although the UK economy is in better shape now than it was in 2008, there are clear parallels in terms of sheer unpredictability. Profit warnings aren’t an absolute measure of performance, but they do track a company’s ability to meet their forecasts, which is clearly more difficult in an uncertain environment.”

In the last 12 months, almost 18% of UK companies have issued a profit warning – the highest figure since Q4 2008.

Retail profit warnings hit an eight-year high in run up to Christmas

Profit warnings from the UK FTSE retail sector have hit an eight-year high in 2019, ahead of the all-important festive period. 28 warnings were recorded between January and September this year by the sector, 22% more than the total recorded in the whole of 2017 (23).

Hutt commented: “The odds are stacked against some retailers as they go into the all-important final quarter of the year. Sales have slowed, in-store and online, throughout 2019 and dipped further in September.

“Retail’s biggest problem isn’t consumers’ ability to spend, but their willingness. Despite a strong labour market, rising wages, low inflation, and improving disposable incomes, the public’s concern for the broader economy is hitting discretionary spending especially hard.”

The UK FTSE sectors issuing the most profit warnings in Q3 2019 were Retailers (9), Software & Computer Services (9) and Media (7). Companies issuing a profit warning experienced a median first-day share price fall of 17.7%, compared to 20.9% in the previous quarter, and well above the 13.6% average (since 2007).

‘Brexit-related’ warnings

As outlined in EY’s quarterly report, 22% of the profit warnings issued in Q3 2019 by UK quoted companies cited Brexit, compared to 10% in Q1 2019 – the quarter before the March exit deadline. Around half of the ‘Brexit-related’ warnings issued in the last year have come from FTSE sectors heavily exposed to market volatility and discretionary spending.

Hutt concluded: “As we move further into the final quarter of the year, a particularly crucial period for consumer-facing sectors, companies will need to react quickly to changing conditions to avoid becoming another profit warning statistic.”