Profit warnings peak for East Midlands PLCs in 2019

Dan Hurd, EY’s Head of Restructuring in the Midlands

Profit warnings issued by listed businesses in the East Midlands in 2019 reached their highest level in over a decade, according to EY’s latest quarterly Profit Warnings report.

In the region, 20 profit warnings were recorded by EY last year, almost double the number in 2018 (11), and the highest level since 2008 – the peak of the financial crisis – when 23 warnings were issued.

The bulk of profit warnings issued in the East Midlands were issued in quarter two and quarter three, accounting for 75% of the region’s total annual warnings in 2019. The year ended on a brighter note, with the number of warnings issued falling to three in the final quarter of 2019, one fewer than the same quarter of 2018.

The sectors that were hit the hardest in the region throughout the year, issuing the most profit warnings, were: FTSE Retailers (6); Construction & Materials (5); and Industrial Support Services (4).

Dan Hurd, EY’s Head of Restructuring in the Midlands commented: “2019 was a challenging year, full of twists and turns that undoubtedly contributed to the number of profit warnings rising and falling throughout the year. A toxic combination of protracted uncertainty and rapid sector change left many companies facing an uphill struggle to meet their earnings forecasts in 2019. However, profit warnings tailed off at the end of the year, perhaps as businesses in the region adjusted their earnings, which will certainly stand them in good stead for 2020.”

UK warnings also ‘exceptionally high’

UK quoted companies issued 313 profit warnings in 2019, rising by 9% year-on-year (287 in 2018) to reach the highest annual total of warnings since 2015. Particularly striking is the proportion of FTSE listed companies warning in 2019 (17.8%), which marginally surpassed 2008 (17.7%), to reach an 18-year high (2001: 22.7%).

In Q4 2019, 22% of UK profit warnings blamed ‘political uncertainty’, according to the report. Over a third of warnings also pointed to delayed or cancelled contracts, a clear indication of the impact of uncertainty on earnings.

Another bruising year for retailers

For the second year in a row, a third or more of the FTSE Retailer sector issued a profit warning, despite disposable incomes rising over the last 12 months.

Hurd adds: “Weak consumer confidence, rising costs and intense promotional activity have created an exceptionally tough climate for retailers, who face an additional race to adapt to rapidly changing shopping habits.

“Post-Christmas trading updates once again underlined the stark contrast between the retailers that are creating a compelling, engaging online and store offering, and those who have fallen behind.”

FTSE Retailers profit warnings fell from 36 in 2018 to 32 in 2019, with just four warnings issued in the final quarter of the year. But only after a bruising period of profit warnings and sector restructuring, that has led to a widespread downgrade of profit expectations.

Impact of uncertainty on corporate decision making

Sectors with the largest exposure to the impact of uncertainty on consumer and business discretionary spending issued the most profit warnings in 2019.

FTSE Retailers issued the most warnings in 2019 (32), followed by FTSE Industrial Support Services and FTSE Software & Computer Services, which both issued 25 warnings, hit by the impact of delayed decision making that also led to a seven-year high in warnings from FTSE Construction & Materials.

FTSE Technology Hardware & Equipment had the highest percentage of companies warning in 2019 at 56%, with earnings hit by the US-China trade dispute and slower growth in key end-markets – especially automotive.

2020 outlook

Hurd concludes: “Easing political tensions and promises of UK fiscal expansion could help more companies beat depressed expectations in 2020. The median share price fall on the day of warning fell to a two-year low in the second half of 2019, which suggests that investors have priced in some of their concerns.

“But, underlying stresses and tensions mean that profit warning numbers could rise quickly again. Companies need to remain flexible, agile and alert to changes on multiple horizons.”