Since the global financial crisis more than a decade ago, more FTSE-listed companies have been forced to issue profit warnings this quarter as the cost of doing business in the UK has risen.
Businesses have faced a toxic combination of rising inflation — especially energy costs — as demand comes under pressure from deteriorating economic conditions and rising interest rates.
EY-Parthenon analysis shows that companies issued 86 profit warnings in the third quarter of 2022, up from 51 in the same quarter last year and the highest in that three-month period since 2008. A profit warning is a statement to the stock market that says that full year earnings will be below market expectations.
More than half of the profit warnings issued in the quarter were caused by rising costs, while a quarter were related to labor shortages.
Consumer-focused sectors such as retail and hospitality were the hardest hit, accounting for more than half of all warnings in the third quarter, as valuations plummeted for tech companies and companies once seen as ‘pandemic winners’ have increased concerns. .
Cost issues feature in 70 percent of consumer alerts in the industry, with many companies saying they struggle to pass on price increases to customers. Falling consumer confidence and changing purchasing behavior were reported in half of them.
Many businesses entered this year with confidence as the worst effects of the coronavirus pandemic ended, fueling hopes of a surge in demand among people forced to stay at home. However, pressure on incomes since the summer has hit those plans.
EY said there is now a “danger zone” of 28 publicly traded companies that issued three consecutive profit warnings in the past year, compared to 18 at the end of the second quarter. It said, on average, one in five companies goes public within a year of their third warning, mostly due to insolvency.
Companies that have issued profit warnings in recent weeks include Royal Mail, Saga, Shell, Boohoo, Next and Character Group.
EY-Parthenon partner Jo Robinson said companies faced an “unprecedented combination of headwinds, including rising costs, declining demand and oversupply, making it increasingly difficult to balance competing priorities”.
The highest number of warnings in the third quarter was in 2001 when 133 were issued.
More than 40 percent of FTSE-listed retailers and more than 60 percent in the FTSE personal care, drugstore and grocery sector have issued a profit warning in the past 12 months, which EY attributed to rising costs, supply chain and labor challenges. as well as declining consumer confidence.
Companies in the FTSE travel and leisure sector issued 22 profit warnings in the first three quarters of 2022, double the number in the same period in 2021.
Observers have also warned about earnings prospects for next year. Berenberg analysts said last week that the S&P 500, Stoxx 600 and FTSE 350 were in net downgrade territory for the first time since 2020. [we] expects the weight of the write-downs to increase in the coming months”.
“The cost of debt for businesses and households has risen amid a weakening demand picture,” it said. “At the same time, input costs remain high, labor markets are historically tight and geopolitical dynamics are driving up the cost of doing business.”