More FTSE-listed companies have been forced to issue profit warnings this quarter than at any time since the global financial crisis more than a decade ago as the costs of doing business in the UK has soared.
Companies have faced a toxic combination of soaring inflation — in particular energy costs — at the same time as demand comes under pressure from worsening economic conditions and rising interest rates.
Analysis by EY-Parthenon found 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 exchange that says full-year profits will be below market expectations.
More than half of the profit warnings issued in the quarter were caused by rising costs, while a quarter related to labour shortages.
Consumer-facing sectors such as retail and hospitality have been among the hardest hit, accounting for over half of all warnings in the third quarter, while the fall in valuations for technology companies and those once seen as “pandemic winners” has added to the worries.
Cost issues featured in 70 per cent of consumer-facing sector warnings, with many companies saying they are struggling to pass on price increases to customers. Falling consumer confidence and changing buying behaviour were flagged in half of them.
Many companies entered this year with confidence as the worst effects of the coronavirus pandemic were ending, spurring hopes for a surge in demand among people who had been forced to stay home. However, the squeeze on incomes since the summer has hit those plans.
EY said that there was now a “danger zone” of 28 listed companies that have issued three consecutive profit warnings in the past year, compared with 18 at the end of the second quarter. It said that on average, one in five companies delist within a year of their third warning, mostly due to insolvency.
Companies to have issued profit warnings in recent weeks include Royal Mail, Saga, Shell, Boohoo, Next and Character Group.
Jo Robinson, EY-Parthenon partner, said businesses were facing an “unprecedented combination of headwinds including rising costs, slowing demand and excess supply, 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 per cent of FTSE-listed retailers and more than 60 per cent in the FTSE personal care, drug and grocery stores sector issued a profit warning in the past 12 months, which EY attributed to spiralling cost, supply chain and labour challenges, as well as to falling consumer confidence.
Companies in the FTSE travel and leisure sector issued 22 profit warnings in the first three quarters of 2022, double the number issued in the same period in 2021.
Observers have also warned over the earnings outlook for next year. Analysts at Berenberg said last week that the S&P 500, Stoxx 600 and FTSE 350 were in net-downgrade territory for the first time since 2020. But the bank added that it was “still early in the earnings downturn and [we] expect the weight of downgrades to grow in 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 elevated, labour markets are historically tight and geopolitical dynamics are increasing the costs of doing business.”