Yorkshire profit warnings rise
PROFIT warnings from listed businesses in Yorkshire and the North East increased by 75% in the third quarter of this year in contrast to a more positive UK picture, according to latest figures.
EY’s Profit Warnings report reveals that seven warnings were made in the region between July and September 2013 – the highest number recorded in a third quarter in the last five years – compared to four in Q2 and ten in Q1.
Sectors to issue warnings in Yorkshire and the North East in Q3 included: Support Services (3); Alternative Energy (1); Electronic & Electrical Equipment (1); Food & Drug Retailers (1); and General Financial (1).
In comparison to Yorkshire and the North East, the number of warnings issued by UK listed businesses rose by just 3% in the third quarter – 56 from 54 in Q2 2013. However, there was a sting in the tail for UK plc with a late spike in warnings in September (26) – the highest level seen in this particular month since the height of the financial crisis in 2008.
Hunter Kelly, Yorkshire restructuring partner at EY, said: “Overall the economic outlook is still improving and perhaps there is a sense that we’re moving onto the next stage of the recovery, where growth may come at the expense of profits.
“In the last few years, companies used a mixture of cost cutting and operational improvements to boost earnings, but now we’re seeing a combination of deep operational restructuring – including strategic divestments – coupled with economic growth. However, any false assumptions as to the path of that growth will quickly reflect in forecasts.”
If profit warnings are any indication, the recovery is leaving one critical group of companies behind.
Smaller companies – those with a turnover under £200m – have issued more profit warnings in the first three quarters of 2013 than over the same period in 2012 (118 vs. 111 respectively). This compares with a 34% fall in profit warnings from companies in the £201m to £1 bn turnover band (56 to 37).
Mr Kelly said: “Smaller companies are inherently more vulnerable to profit warnings since they are more likely to find a squeeze on sales or change in pricing having a more material effect on profit expectations, although this doesn’t entirely explain why their fortunes are diverging now.
“Perhaps their smaller management teams make it more difficult to plan and make the best of the upturn. Whatever the reason, if the earnings of smaller companies are recovering less quickly than expected, they may be less able to drive economic and employment growth – and that has implications for the entire economy.”
For only the second quarter since 1999, the FTSE General Retailers sector didn’t issue a profit warning. The recent rise in consumer spending and hopes for a merry Christmas gave retailers reason to remain optimistic, although the festive season normally shakes out those who get the buying and positioning wrong.
There were three profit warnings from FTSE Food Producers in Q3 2012, the highest number since 2011. However, considering the combination of pressures the sector has handled this year, from the horsemeat scandal to tough markets in Europe and a slowdown in emerging markets, 15% of the sector warning in the last 12 months is arguably a strong performance.
Mr Kelly says that while it is an improving economic picture, concerns over the strength of the recovery remain: “The UK recovery is still based upon consumers, who are providing the impetus for growth, but are yet to feel the benefit,” he said.
“Increasingly optimistic business surveys imply that wages and investment will provide the UK recovery with greater breadth and stability in 2014. However, for now, companies still appear discouraged from matching optimism with investment. Removing this trepidation remains the key to establishing a more stable and sustainable recovery.”
