North-west profit warnings doubled year-on-year in third quarter of 2022

UK-listed companies in the North-west of England issued twice as many profit warnings in the third quarter of 2022 compared to the same period the previous year, according to analysis by Big Four accountancy firm, EY.

The EY-Parthenon Profit Warnings report found eight warnings were issued in the region between July and September 2022, up from six in the previous quarter, and four in the same period in 2021.

The third quarter’s eight warnings represent the region’s highest third-quarter profit warnings total since 2019.

Sam Woodward, EY-Parthenon UK&I Turnaround and Restructuring Partner in the North West, said:

“The volume of profit warnings in the North-west had cooled since last winter, but challenges for businesses have increased over the last few months, leading to rising numbers of warnings. Given the impact of the cost-of-living crisis on consumers, it‘s unsurprising to see consumer-facing businesses among the most affected across the region.

“We’re approaching the important ‘golden quarter’ of Q4, during which retailers have traditionally looked to maximise seasonal sales opportunities. However, with ongoing geopolitical challenges and disruptions in supply chains skewing working capital for many, businesses in the North-west and further afield could be facing another difficult period.”

Nationally, profit warnings issued by UK-listed companies in Q3 2022 reached their highest third-quarter total since 2008. A total of 86 profit warnings were issued between July and September 2022, compared to 51 in the same period of 2021, an increase of 69% and a 34% increase from Q2 2022 when 64 warnings were issued.

Consumer facing industries saw the highest volume of warnings issued, both locally and nationwide, as a result of the ongoing squeeze on consumer finances. Cost issues featured in 70% of all consumer-facing sector warnings with many companies saying that they are struggling to pass on price increases to customers, while falling consumer confidence and changing buying behaviour featured in 50% of warnings.

Over 70% of retailers issuing a warning in Q3 referenced weakening consumer confidence, while inventory challenges have also intensified as falling demand creates surplus stock issues. The retail sector has also been grappling with long-term structural change. Most retailers issuing warnings in 2022 operate exclusively or mostly online and are feeling the impact of the post-pandemic shift back to store sales on top of increased delivery costs and product returns.

Silvia Rindone, EY UK&I Retail Lead, said:

“The retail sector is facing a challenging winter while according to the EY ITEM Club Autumn Forecast, the UK economy is expected to be in recession until the middle of next year. However, there are steps businesses in the sector can take to prepare. For example, it is critical that retailers use the breathing space provided by the energy price cap to safeguard their long-term survival. This means reviewing their pricing strategy and considering how and where they can pass price rises on, developing robust cash management plans and inventory visibility to avoid costly write-offs.

“Above all, retailers need to adapt to changes in consumer behaviour. Our Future Consumer Index shows that the market is polarised between cash strapped consumers watching every penny and those willing and able to spend if retailers entice them. Navigating this K-shaped profile, focusing on core products, and understanding what will drive growth will be the key to thriving in the current economy.”

The travel and leisure sector has also seen its profit warnings double nationally, despite having benefited from pent-up consumer spending immediately following the Covid-19 pandemic. Sam Woodward addded:

“Christmas will be a critical period for the travel and leisure sector, particularly hospitality. Winter is also when traditionally tour operators start to see deposits for summer travel coming in, but consumers are increasingly taking a wait and see approach creating cash flow challenges and making it much harder for businesses to plan. 

“Some companies will struggle to adapt, and some will be vulnerable to failure. But for travel and leisure companies who draw upon their experience, resilience, and agility, and tell a compelling long-term value story, the opportunities are significant.”