Supply chain issues and rising costs drive profit warnings back to pre-pandemic levels

The number of profit warnings issued by UK listed businesses based in the Midlands rose in the third quarter of the year, to six (from five in Q2).

Nationally, profit warnings rose to 51 in the third quarter of the year, up 19 from Q2 2021, as threats to growth and profitability increased, according to EY-Parthenon’s latest Profit Warnings report.

The report reveals that while a post-pandemic demand surge boosted sales for many businesses over the summer months, it has also exposed vulnerabilities in supply chains and energy and labour markets, with 43% citing these pressures as the reason for their profits warning. Most warnings in the region came from Industrial FTSE sectors and a third (33%) of Midlands-based companies issuing a warning said that supply chain issues were hampering their business.

Midlands listed businesses issued the joint second highest number of profit warnings, along with the South East (6) although significantly behind London (27).

Nearly two-fifths (39%) of UK companies’ warnings were also affected by the fallout of COVID-19 – down from 72% in the previous quarter. Whilst the direct impact of the pandemic is waning, the increase in supply and cost pressures, and the end of government furlough support, will add to the challenge – especially for sectors where demand hasn’t yet returned to pre-COVID-19 levels.

Businesses with annual turnover of under £100m issued 50% of the third quarter’s profit warnings and almost 60% of the warnings were from AIM listed companies, typically small to mid-market companies which are less resilient to economic headwinds. New headwinds, including the impact of the steep rise in energy costs on a wide range of sectors, has also led to a high proportion of new companies warning for the first time.

Dan Hurd, EY Parthenon UK&I turnaround and restructuring leader in the Midlands, said: “Whilst it’s encouraging that profit warnings among Midlands-based businesses remain low, evidence from the last few years has shown a trend for warnings to dip during Q3. The last two years has been anything but normal trading for businesses and there is nothing straightforward about this recovery. Whilst UK profit warning levels remained low during the summer they jumped dramatically back to above-average levels in September, as supply chain and cost stresses cascaded through the economy.

“Over the last 18 months, government support has mitigated the impact of massive changes in the UK economy. These measures have now come to an end and the remainder of the year will reveal those surviving on life support, as the government removes most, but not all of its props.”