The number of profit warnings issued by UK-listed companies in the first six months of 2022 increased 66 per cent compared to the same period in 2021, with a record number of companies citing rising costs as the reason behind their warning, according to EY-Parthenon’s latest Profit Warnings report.
The report reveals that 136 profit warnings were issued in H1 2022, up from 82 in the first six months of 2021. In the second quarter of 2022, 64 warnings were issued, down slightly from the 72 issued in Q1 but still 10 per cent above the pre-pandemic average and double the 32 warnings issued in Q2 2021.
Half of all the profit warnings issued in H1 2022 by UK-listed companies came from consumer-facing sectors, compared with a third in H1 2021. FTSE Retailers issued 16 profit warnings in H1 2022, compared with ten warnings in H1 2021, while warnings in the FTSE Personal Care, Drug and Grocery Stores sector reached a record high of 13.
Three-quarters of the FTSE Retailers that issued a warning in the first half of 2022 came from companies which operate exclusively or mostly online. These companies have been particularly affected by the shift in sales back to ‘bricks and mortar’ stores and were disproportionately affected by increasing delivery costs and product returns.
“Consumers carried record levels of savings, built up over the pandemic, into 2022," said Amber Mace, UK&I Consumer Products & Retail Sector Leader. "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 per cent of low- and middle-income consumers are now only purchasing the essentials, compared to 26 per cent 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.”
Of all the warnings issued in Q2 2022, a record 58 per cent of companies cited rising costs as one of the main reasons behind the warning, up from 43 per cent in Q1, while 19 per cent noted labour market issues. In total, of the 1,222 UK-listed companies, 70 have issued at least two consecutive warnings in the last twelve months. On average, one-in-five companies delist within a year of their third warning, most due to insolvency.
