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Profit warnings in 2023 exceed financial crisis peak

Author: ICAEW Insights

Published: 12 Feb 2024

There were 294 profit warnings from UK-listed companies last year, with high interest rates and wavering consumer and business confidence among the key drivers.

Almost one in five UK-listed companies issued profit warnings last year, more than at the peak of the financial crisis in 2008, new analysis has revealed.

In total, 294 warnings were issued in 2023, representing 18.2% of all UK-listed companies, according to EY-Parthenon’s latest Profit Warnings report. Although the total marks a small decrease of 11 from 2022 when 305 warnings were given, the proportion of companies issuing profit warnings is up 0.5 percentage points from the 17.7% reported at the peak of the global financial crisis in 2008. 

EY-Parthenon – the global strategy consulting arm of EY – says high interest rates and wavering consumer and business confidence were among the key drivers behind warnings last year. More than a quarter of warnings (26%) were attributed to delayed contracts or decisions, and 19% blamed increased costs.

A third of warnings issued in Q4 2023 were from large listed businesses, double the average rate.

Meanwhile, stress is particularly pronounced among companies within the FTSE Retailers and FTSE Support Services sectors.

Smaller companies, which are more vulnerable to demand and margin pressures, dominated warnings at the start of 2023. However, by Q4 pressure had broadened as a third of the companies warning (33%) had annual revenues of more than £1bn, more than double the average number of warnings given by businesses of this size.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, says: “While pressure around costs eased somewhat toward the year end, the uptick in warnings caused by delays to business decisions and weak consumer confidence indicates an ongoing reluctance to commit to discretionary spending. 

“In 2024, businesses will hope for a quicker-than-expected fall in inflation and interest rates, but many moving parts need to slot into place before we can be sure of an economic ‘soft landing’.” 

The firm is predicting a growing gulf between businesses positioned to take advantage of limited growth and those hampered by the impact of recent earnings pressures or struggling with access to and the cost of capital. “It is shaping up to be an easier year for many, but not all, UK companies,” Robinson adds.

Cost pressures appeared to ease towards the end of 2023, causing just 10% of warnings in Q4 compared with 41% in the same period of the previous year. However, corporate spending delays and higher interest rates became an increasing issue in 2023, with the latter prompting 24% of profit warnings in H2 2023, compared with 14% in the first half of the year.

In 2023, 39 listed companies issued their third or more consecutive profit warning in 12 months, representing 18% of all companies that issued a warning last year. This compares to 31 companies that issued their third or more consecutive profit warning over a 12-month period in 2022. To date, 13% of companies that warned over profits for a third or more times in 2023 have gone on to de-list.

Industrial and consumer sectors lead profit warnings

FTSE industrial support services issued the highest number of warnings in 2023 with 25, the largest amount reported by the sector since the pandemic. This was followed by FTSE retailers (24), FTSE software and computer services (21), FTSE media (17) and FTSE construction and materials (16).

Half of all FTSE leisure goods companies issued a profit warning in 2023. High rates of warnings were also seen across FTSE household goods and home construction (45%) and FTSE chemicals (41%) during 2023.

FTSE retailers under increasing pressure

The rate of profit warnings remained high for FTSE retailers – the sector issued 24 profit warnings in 2023, compared with 36 in 2022. Retail was one of the hardest hit sectors last year, with two in every five FTSE Retailers warning during 2023. The pressure on disposable incomes, while easing, remains high, meaning discretionary spending in non-food areas such as fashion continues to be impacted.

George Mills, Partner and Special Situations Debt Advisory Lead at EY, says traditional funders will be cautious about investing in sectors with high consumer discretionary exposure. “Businesses will need to demonstrate strong historical performance as well as robust forecasts capable of withstanding a future downturn if they want to refinance on the best terms,” he says. “If not, they risk encountering challenges when refinancing and may have to explore other avenues for capital, such as turning to alternative lenders or seeking equity injections.”

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