UK profit warnings up 10 percent year on year, says EY

Third-quarter profit warnings are up 10 percent year on year, according to the latest research from EY.

The 75 profit warnings issued in the third quarter of the year by UK companies is ‘significantly above average for the period,’ says EY, and well above the 45 issued in the previous quarter. The post-financial crisis average for the quarter is 62. Brexit uncertainties, the weaker pound and digital disruption are all ingredients in the recipe for more profit warnings, adds EY.

‘The biggest quarterly rise in profit warnings in almost six years has come directly after one of the biggest falls, reflecting the unpredictable economic climate,’ write the authors of the Diverging fortunes report from EY, while the ‘yo-yo profit warning data reflects the difficulties faced by companies forecasting in such unpredictable times.’

But despite the increase in companies being forced to issue such warnings, not all sectors are suffering. At one end of the scale, FTSE industrial sector warnings are at their lowest for six years; at the other, one sub-sector alone – home improvement retailers – makes up almost half of retail warnings in the last six months, adds EY. 

‘Many businesses besieged by pricing pressures before Brexit are now also feeling the brunt of rising domestic uncertainty and increasing costs,’ write the report authors, adding that ‘digital disruption’ adds yet more pressure. ‘Companies caught on the wrong side of economic, sector and digital trends, and those [that] lack the financial or operational ability to adapt, are struggling to break free. 

‘In sectors where it is essential to continually invest and innovate – such as retail and restaurants – this stress is becoming increasingly apparent.’

Indeed, EY findings show that 42 percent of companies issued what was at least their second profit warning of the year during Q3. 

As the number of warnings issued has increased, so has the impact on share price on the day of the announcement, finds EY, with the average drop going from 15.9 percent to 17.3 percent: ‘A signal that markets have become more risk-averse.’