North West profit warnings up 14% in 2019

Sam Woodward

The number of profit warnings issued by North West-listed companies was significantly above average in 2019, according to EY’s latest quarterly Profit Warnings report.

North West quoted companies issued 33 profit warnings in 2019, a 14% increase on 2018 (29), and above the region’s 11-year average (26).

Except for 2017 (34), last year represented the highest level of annual warnings seen in the region since the peak of the financial crisis in 2008, when EY also recorded 33 warnings.

Warnings were spread evenly across the year, with eight in the first, second and fourth quarters, and nine in the third quarter.

Companies in FTSE Consumer Discretionary sectors – including Retailers and Travel & Leisure – were hit the hardest throughout the year with 11 profit warnings issued in 2019.

Sam Woodward, EY restructuring partner in the North West, said: “2019 was a challenging year, full of twists and turns that undoubtedly contributed to a remarkably high level of profit warnings.

“A toxic combination of protracted uncertainty and rapid sector change left many companies facing an uphill struggle to meet their earnings forecasts in 2019.”

UK-quoted companies issued 313 profit warnings in 2019, rising by nine per cent year-on-year (287 in 2018) to reach the highest annual total of warnings since 2015.

Particularly striking is the proportion of UK-listed companies warning in 2019 (17.8%), reaching an 18-year high (2001: 22.7%).

In quarter four 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.

UK retailers experienced another bruising year and a challenging Christmas in 2019.

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 past 12 months.

Woodward added: “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.”

While FTSE Retailers profit warnings fell from 36 in 2018 to 32 in 2019, this is in context of a bruising period of profit warnings and sector restructuring that has led to a widespread downgrade of profit expectations.

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. FTSE Construction & Materials issued 18 warnings – a seven-year high.

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.

Woodward concluded: “Easing political tensions and promises of UK fiscal expansion could help more companies beat depressed expectations in 2020.

“However, 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.”