Listed companies in the UK admitted profits would be lower than expected at a rate not seen since 2008, a new report has found.
The EY-Parthenon’s latest Profit Warnings report said consumer-facing companies including retailers and those in the travel and leisure sectors were worst affected, having faced a significant increase in the number of warnings – up three-fold year on year.
Passing costs onto consumers
Cost issues featured in 70% of all consumer-facing sector warnings with many companies saying that they are struggling to pass on price increases to customers, while falling consumer confidence and changing buying behaviour featured in 50% of warnings.
Silvia Rindone, EY UK&I retail lead, said retailers needed to adapt to consumer trends as well as preserve cash in order to survive an expected economic recession in 2023.
She 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.”
She added it was “critical” that retailers “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, developing robust cash management plans and inventory visibility to avoid costly write-offs.”
She said consumer trends were now “K-shaped”, between buyers with no extra money to spend and those who demand retailers go further to attract them.
“Above all, retailers need to adapt to changes in consumer behaviour. Our Future Consumer Index shows that the market is polarised between cash-strapped consumers watching every penny and those willing and able to spend if retailers entice them,” she said.
“Navigating this K-shaped profile, focusing on core products, and understanding what will drive growth will be the key to thriving in the current economy.”
Meanwhile, the post-covid boom enjoyed by the travel and leisure sectors is now being outpaced by pressure on disposable income and a slump in consumer confidence, which is set to intensify during a vital period for the sector, the report said.
Jo Robinson, EY-Parthenon partner, said: “Christmas will be a critical period for the travel and leisure sector, particularly hospitality.
“Winter is also when traditionally tour operators start to see deposits for summer travel coming in, but consumers are increasingly taking a wait-and-see approach, creating cash flow challenges and making it much harder for businesses to plan.
“Some companies will struggle to adapt, and some will be vulnerable to failure. But for travel and leisure companies who draw upon their experience, resilience, and agility, and tell a compelling long-term value story, the opportunities are significant.”
Companies in ‘danger zone’
In total, 86 profit warnings were issued between July and September 2022, compared to 51 in the same period of 2021, an increase of 69% and a 34% increase from Q2 2022 when 64 warnings were issued. The highest number of Q3 warnings was in 2001 when 133 were issued.
The three warning ‘danger zone’ now contains 28 listed companies who have issued their third consecutive profit warning in the last year, compared to 18 at the end of Q2 2022.
On average, one-in-five companies delist within a year of their third warning, most due to insolvency.
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