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Listed businesses in the North West issued 15 profit warnings in the first quarter of 2022, more than triple the number from January to March 2021, according to the latest data from the EY-Parthenon Profit Warnings Report.
The region’s businesses have cited supply chain disruption (36%) and rising costs (69%) in issuing profit warnings, with all sectors affected, including consumer-facing businesses in the North West. The number issued is in line with the previous quarter, and stands at the highest level since Q1 of 2020, amid significant uncertainty over the impact of Covid-19 in China.
Sam Woodward, EY Parthenon UK&I Turnaround and Restructuring Partner in the North West said:
“Profit warnings issued across the North West have increased significantly in the last two quarters, with the last two quarters seeing 15 warnings.”
“We expected that 2022 would be a difficult year for companies to navigate as inflationary pressures, which had been building throughout 2021, were already putting pressure on company margins and consumers’ real incomes. We are now looking at a year with ongoing COVID-19 disruption alongside higher inflation, greater uncertainty, and faster monetary tightening than we expected just a few months ago.”
While nationally the impact of supply chain challenges on listed companies appeared to lessen during Q1 of 2022, EY’s analysis forecasts that supply chain challenges could be even tougher in 2022 than in 2021. The periodic breakdowns in supply witnessed last year may potentially give way to significant challenges for material and product availability in the most exposed sectors in 2022. The war in Ukraine has helped tighten supplies in areas like metals and semiconductors, which has led to businesses again adjusting production and forecasts, as well as having to factor in increases in energy and transport costs. In addition, the biggest emerging issue in profit warnings, according to EY’s data, is contract delays and cancellations, reflecting the increasing uncertainty around company investment decisions.
The retail sector, despite strong levels of consumer spending, issued its highest quarterly total of profit warnings nationwide, accounting for nearly one-in-five (17%) listed retailers. Retail has been affected by supply issues with 67% of retail warnings citing supply chain disruption, 75% blaming increased costs and over half (56%) revealing staffing issues in the last six months. Consumer sector profit warnings look set to remain high as the ability to pass costs on depends on the capacity of increasingly pressured consumers to absorb them.
Silvia Rindone, EY UK&I Retail Lead:
“Our data underlines the challenges ahead for UK retail. The sector’s problems so far have been largely on the supply – rather than demand – side. Companies will now be facing a combination of supply chain, cost, and demand headwinds, as the rise in the cost-of-living affects real incomes and creates a challenge for the sales growth that has helped drive the recovery so far.
“It is vital that companies respond to consumers’ concerns. Our latest Future Consumer Index revealed that more than two-thirds of UK consumers are worried about their finances. So, we expect significant ‘trading down’, as we saw in the last financial crisis, but we also expect an increasing focus on ‘value for money’ options as sustainability-conscious consumers look for purchases that will last. Retailers will also need to focus on operational resilience by creating clear inventory visibility and a strong cash culture to minimise costly write-offs and optimise working capital to ensure they have the capital necessary to focus on growth and transformation. Digital opportunities and consumer expectations will continue to grow, regardless of the economic backdrop.”