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Year-on-year FTSE profit warnings for Q3 up almost 70%

Author: ICAEW Insights

Published: 09 Nov 2022

Unprecedented combination of headwinds spawns 14-year high for Q3 profit alarms among listed companies, with consumer-facing segment under particularly high pressure.

UK-listed corporates issued 86 profit warnings in Q3 this year – up from 51 in the same part of 2021 – according to research from EY-Parthenon. Marking a year-on-year rise of 69%, the figure stands as the highest Q3 total for FTSE profit warnings since 2008.

More than half of the warnings issued in Q3 emerged from consumer-facing sectors, as demand and confidence continued to fall. Some 57% of the warnings cited issues around rising costs, while 23% stemmed from labour-market challenges.

As a result of the Q3 surge, there are now 28 UK-listed companies that have issued their third consecutive profit warning in the past year, compared with 18 at the end of Q2. In its announcement of the findings, EY-Parthenon described the three-warnings category as a ‘danger zone’, noting that, on average, one in five companies delist within a year of their third warning – mainly through insolvency.

Post-pandemic shift

In the troubled consumer-facing market, companies issued a total of 44 warnings – the segment’s highest quarterly tally since the start of the pandemic. Consumer sectors with the highest numbers of warnings in Q3 were retail (11), travel and leisure (nine) and food producers (seven) – with economic conditions forcing the latter to a 21-year high.

Cost issues featured in 70% of consumer-market warnings, with many businesses saying that they are struggling to pass on price increases to customers, while falling confidence among consumers and changing buying behaviours were key themes in half the warnings.

Amid a sector grappling with long-term structural change, the majority of retailers that have issued warnings this year operate primarily or exclusively online, and are feeling the impact of a post-pandemic shift back to in-store sales as well as increased costs related to deliveries and product returns.

EY UK and Ireland Retail Lead Silvia Rindone said: “The retail sector is facing a challenging winter, while according to the EY ITEM Club Autumn Forecast, the UK economy is expected to be in recession until the middle of next year. However, there are steps businesses in the sector can take to prepare.”

In particular, Rindone said it was critical for retailers to use the breathing space provided by the energy price cap to safeguard their long-term survival. “This means reviewing their pricing strategy and considering how and where they can pass price rises on, [plus] developing robust cash management plans and inventory visibility to avoid costly write-offs.”

Uncertain outlook

Looking across the whole range of sectors that filed profit warnings in Q3, EY-Parthenon partner and UK & Ireland Turnaround and Restructuring Strategy Leader Jo Robinson said that businesses are facing an “unprecedented combination” of headwinds, making it increasingly difficult to balance competing priorities.

“With so many uncertainties in the outlook, it’s vital that companies develop resilience and demonstrate a clear understanding of how their business will adapt under different geopolitical and economic scenarios, Robinson said.

Increasing uncertainty means that events could move quickly for companies that show signs of stress. “Turning the situation around requires a swift response, sustainable and defendable forecasts, and the building of stakeholder trust in management,” Robinson added.

ICAEW Director of Corporate Governance and Stewardship Peter van Veen says: “When you conduct a scenario-planning exercise, it’s important to look far enough ahead that a) you won’t fall foul of groupthink, and b) you won’t just pick up on a rather obvious, narrow range of trends that everyone is already considering for the next 12 or 24 months.

“Depending on your industry and how quickly it changes, if you look five or even 10 years out you will inevitably find yourself considering scenarios or outcomes that may look implausible in the next year or two. But by pushing those boundaries and thinking far enough ahead, you’ll challenge your business in a more fundamental way in the short term than by considering incremental changes.”

Van Veen adds: “Last year, the majority of leaders wouldn’t have considered war in Europe to be a realistic possibility. But if we look at the companies that pulled out of Russia shortly after the beginning of conflict in Ukraine, I strongly suspect many of them would have devised business, communication and stakeholder management plans to address the fallout of exiting that market. So, you can never over-test the resilience of your business against certain scenarios, however unlikely they may at first seem.

“Indeed, I would suggest that the paths towards different, equally plausible, long-term scenarios may look quite similar – so the things you should do on the way may be quite similar, too. A big part of resilience testing is about developing robust strategic options that a focus on the next two years may not reveal.”

He adds: “The finance and accounting part of your organisation must be at the forefront of quantifying the financial impacts of the various scenarios you are exploring. You must have the confidence that, on the basis of working through the numbers, you have a strong idea of how those events could affect the bottom line. That way, your scenario planning won’t be just a nice, philosophical debate between experts about the potential outcomes.”

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