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Profit warnings rise as macroeconomic pressures continue

Author: ICAEW Insights

Published: 17 May 2024

Contract cancellations and delays, higher costs and weaker consumer confidence lead to significant increase in companies warning about lower-than-forecasted profits.

The number of UK public companies warning about lower profits over the past year rose to 18.7% due to the ongoing macroeconomic pressures, 1% higher than at the peak of the global financial crisis in 2008, according to the latest research. 

By the end of the first quarter of 2024, 39 companies had issued three or more warnings over the last 12 months, with just over a fifth of these companies delisting – or in the process of doing so – due to insolvency or acquisition, EY-Parthenon’s Profit Warnings report says.

The main reason for profit warnings (29%) was contract cancellations and delays, while higher costs and weaker consumer confidence each accounted for 17% of warnings in the first three months of 2024.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, says: “Macroeconomic pressures, while less intense, have not relented in 2024 and the full impact of interest rate increases is yet to be felt by many businesses. 

Robinson says larger companies and sectors such as luxury goods, which typically show resilience in economic downturns, are now also starting to feel these pressures.

The biggest growth in warnings came in the FTSE Personal Goods sector: more than 50% of the sector warned in Q1 2024 alone as earnings pressure spread further into the luxury goods sector.

“The EY-Parthenon report highlights that the biggest growth in warnings came from the personal goods sector. This is hardly surprising given the signs that previously improving consumer sentiment has stalled. Consumer hesitancy, especially in relation to big-ticket purchases, needs to be factored into forward business plans,” says Bob Pinder, ICAEW’s Director, Quality Assurance, Professional Standards.

‘New’ warnings grow

The number of profit warnings by UK listed companies fell 7% year-on-year to 70 in the first three months of the year, and dropped slightly from Q4 2023, when 77 warnings were issued, the research shows.

Despite the quarterly fall in warnings, the number of companies warning for the first time in 12 months reached its highest level since Q1 2022, with 61% of companies in Q1 2024 issuing a ‘new’ warning. 

Robinson reiterates the need for “swift action to preserve value”. Despite some green shoots of recovery, she warns that “companies cannot afford to ignore the warning signs and rely on economic resurgence, particularly as we continue to navigate through an unprecedented period of uncertainty with forthcoming global elections and geopolitical risks still high on the agenda”.

Scenario planning is vital, Robinson says. “Although this looks like an economically easier year on paper” the macroeconomic pressures are “far from over.”

The FTSE Industrial Support Services sector, which encompasses business service providers, industrial suppliers, and recruitment companies, issued nine warnings in Q1 2024 and 18 warnings in the last six months, more than the whole of 2022, with the sector significantly impacted by falling business spending and recruitment, rising costs, and cancelled or amended contracts. 

Financial services

Companies in financial services sectors reported 11 warnings in Q1, the highest number since the pandemic, and before that, the global financial crisis in 2008. The increase in warnings indicates challenges facing pockets of the financial industry, namely certain lenders exposed to auto finance and some parts of the wealth and asset management industry. 

Meg Wilson, EY-Parthenon Partner, Turnaround and Restructuring Strategy, says: “Some of the demand and supply chain pressures that prevailed during the pandemic haven’t entirely eased, while new stresses are starting to emerge. 

“This is reflected in the number of new profit warnings we’ve seen this quarter, triggered by the impact of fresh trading pressures and by the cumulative impact of economic stresses catching up with larger companies and sectors that typically show higher resilience to economic shocks. 

Prolonged economic stress is also exposing internally driven challenges, Wilson warns. “In Q1 2024, a third of profit warnings cited internal failures, such as troubled contracts, accounting issues, and fraud.”

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