Rising costs prompt increase in profit warnings

The number of profit warnings issued by listed companies in the Midlands in the first six months of 2022 increased 23% when compared to the same period in 2021, with the majority of warnings prompted by rising costs.

According to EY-Parthenon’s latest Profit Warnings report, 16 profit warnings were issued by Midlands-listed companies, up from 13 issued in H1 2021.

Nine warnings were issued in Q2 2022, with seven citing rising costs or supply chain issues as the reason behind the warning

Nationally, the report reveals that 136 profit warnings were issued by UK-listed companies in H1 2022, up 66% from 82 in the first six months of 2021 with a record number of companies citing rising costs as the reason behind their warning. In the second quarter of 2022, 64 warnings were issued, down slightly from the 72 issued in Q1 but still 10% above the pre-pandemic average and double the 32 warnings issued in Q2 2021.

Of the warnings issued in Q2 2022, 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. In total, of the 1,222 UK-listed companies, 70 have issued at least two consecutive warnings in the last 12 months. On average, one-in-five companies delist within a year of their third warning, most due to insolvency.

The FTSE sectors with the highest number of warnings in Q2 2022 were Travel and Leisure (eight), Retailers (seven), and Personal Care, Drug and Grocery Stores (seven) – all of which have been significantly affected by rising costs, supply chain issues and staff shortages.

Despite also contending with an increase in cost, labour, and supply chain stresses, FTSE Construction and Material companies issued just three profit warnings in H1 2022, with many larger companies able to absorb or pass on price increases and leverage their buying power to avoid material shortages.

Dan Hurd, partner at EY-Parthenon in the Midlands, said: “Companies are facing a myriad of headwinds that will challenge even experienced management teams. In Q2 2022 we moved into yet more uncharted territory as inflation and interest rates reached multi-year highs while consumer confidence fell to record lows – all against a backdrop of geopolitical tension. Over the first half of this year, we have seen profit warnings prompted primarily by cost and supply chain issues, but as we start to see a fall in consumer demand and confidence, it is likely that other underlying stresses will become exposed.

“Reflecting the national picture, it has predominantly been consumer-facing listed companies in the Midlands, such as retailers, which have been most affected by rising costs and supply chain issues in the first half of the year. However, we are also seeing manufacturing companies in the region continuing to be affected by ongoing supply chain disruption, as well as rising energy prices.

“Businesses will need to prepare for lower growth, tighter capital and significant market volatility in the coming months.”