Profit warnings surge 66% in H1 FY22

The number of profit warnings issued by UK-listed companies in the first six months of 2022 has increased 66% year-on-year, with a “record” number of companies citing rising costs as the reason behind their warning, according to EY-Parthenon’s latest Profit Warnings report. A “record” 58% of companies cited rising costs as one of the main reasons behind the warning, up from 43% in Q1, while 19% noted labour market issues. Overall, 136 profit warnings were issued in H1 FY22, up from 82 in the first six months of 2021. In Q2 FY22, 64 warnings were issued, down from the 72 issued in Q1 but still 10% above the pre-pandemic average and double the 32 warnings issued in Q2 2021. FTSE finance and credit services companies issued seven profit warnings in H1 FY22, marking the sector’s highest first-half total for profit warnings since 2009 (aside from 2022 due to the pandemic) just after the global financial crisis. Half of all the profit warnings issued in H1 by UK-listed companies came from consumer-facing sectors, compared with a third in H1 FY21. FTSE retailers issued 16 profit warnings in H1, compared with 10 warnings in H1 FY21, while warnings in the FTSE personal care, drug and grocery stores sector reached a “record high” of 13. Additionally, three-quarters of the FTSE retailers that issued a warning in H1 FY22 came from companies which operate exclusively or mostly online. These companies have been affected by the shift in sales back to bricks and mortar stores and were “disproportionately” affected by increasing delivery costs and product returns. Amber Mace, EY UK&I consumer products and retail sector leader, said: “Companies which are managing to weather the storm are those which have a strong focus on demand optimisation and are responding to the needs of their customers by providing value for money and sustainable options. “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.” Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, added: “As profit warnings and stress levels rise, we’re starting to see more companies issue multiple profit warnings and a return of companies approaching the ‘three warning rule’. “Credit providers in the best position will be those that have restructured, created a solid balance sheet, and invested in a technology platform on which to base their lending and weather any storms ahead.”