Supply chain issues and rising costs loom large in profit warnings

Sam Woodward

Supply chain and cost-related issues were cited in four of the five profit warnings issued by listed companies in the North, it has been revealed.

Businesses and customers are suffering increasing disruption from empty shop shelves and rising prices caused by a shortage of HGV drivers and rising costs linked to the increasing costs of training more drivers on higher wages.

EY Partheon’s latest Profit Warnings report showed that the North saw a reduction in profit warnings among listed companies in the third quarter of 2021.

The five warnings were the lowest of any quarter since the fourth quarter of 2014, when four warnings were issued, and a 38% decrease on the second quarter of 2021.

Sam Woodward, EY-Parthenon turnaround and restructuring strategy partner in the North West, said: “Although profit warnings issued by listed companies in the North have fallen – bucking the national trend – it’s clear that businesses are facing significant challenges with their supply chain and the cash stresses that have cascaded through the economy.

“Over the last 18 months, government support has mitigated the impact of massive changes in the UK economy. The remainder of the year will reveal those most vulnerable, as the Government removes most, but not all of its props.”

Those in FTSE Consumer Discretionary sectors – including retailers and travel and leisure – issued the most warnings in the North in quarter three 2021.

While profit warnings in the North fell, the overall number issued by UK listed companies rose to 51 in the third quarter of the year, up 19 from quarter two 2021, as threats to growth and profitability increased.

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.

Nearly two-fifths (39%) of companies warning were also affected by the fallout of COVID-19 – down from 72% in the previous quarter. While 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.