The number of profit warnings issued by listed companies in the South West doubled in the second quarter of the year amid rising costs and supply chain issues, a report has found.
In the first six months of 2022, 136 profit warnings were issued by listed companies across the UK, up from 82 in the first six months of 2021, with a record number of firms citing rising costs as the reason behind the warnings.
The study, from accountancy giant Ernst and Young’s (EY) global strategy consulting arm EY-Parthenon, found six of these warnings came from the South West – up from three in the first quarter.
Despite the increase, the report said the region had bucked the national trend, as the number of warnings issued in the first six months of 2022 overall fell to nine from 11 a year earlier.
Of the warnings issued in the second quarter, 58% of companies cited rising costs as one of the main reasons – up from 43% in the first quarter, while 19% noted labour market issues.
EY said out of the 1,222 UK-listed companies, 70 had issued at least two consecutive warnings in the last twelve months. The firm added that, on average, one-in-five companies delist within a year of their third warning, most due to insolvency.
Lucy Winterborne, a partner within turnaround and restructuring strategy at EY-Parthenon in the South West, said the majority of profit warnings in the region came from FTSE aerospace and defence firms, a key sector for the region.
Ms Winterborne said: “While certain parts of this sector, such as commercial aerospace, should benefit from pent-up consumer spending on travel, rising fuel costs and difficulties employing and retaining staff across the whole air travel ecosystem have disrupted the recovery.
“The difficulty for many will now be forecasting demand given the expected slowdown in consumer spending in the autumn.”
Ms Winterborne added more broadly companies were facing “a myriad of headwinds”.
“In the second quarter [of this year] we moved into yet more uncharted territory as inflation and interest rates reached multi-year highs while consumer confidence fell to record lows – all against a backdrop of geopolitical tension.
“Over the first half of this year, we have seen profit warnings prompted primarily by cost and supply chain issues, but as we start to see a fall in consumer demand and confidence, it is likely that other underlying stresses will become exposed.”
The report said half of all the profit warnings issued so far this year by UK listed firms came from consumer-facing sectors, compared to a third at this stage in 2021. EY noted that nearly half of all firms categorised as ‘personal care, drug and grocery stores’ (47%) and 15% of FTSE retailers issued a profit warning in the second quarter.
Researchers found three-quarters of those retailers came from companies which operated exclusively or mostly online, with these businesses affected by a shift in sales back to bricks-and-mortar stores and increasing delivery costs and product returns.
EY said after carrying record levels of savings built up during the pandemic into 2022, rising prices and a “gloomier outlook” had held back demand and consumer confidence.
Amber Mace, EY’s consumer products and retail sector leader, said: “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.”
Ms Mace said companies which were managing to weather the storm were those providing value for money and sustainable options for customers.
“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,” she added.
The study also found FTSE finance and credit services companies issued seven profit warnings in the first half of 2022. Excluding 2020 and the onset of the pandemic, this reflected the sector’s highest first-half total for profit warnings since 2009 – just after the global financial crisis.
