Profit warnings spike amid economic problems

London-listed companies have issued a series of profit warnings this year as cost inflation bites and customers start thinking about their spending.

A new report has found the number of firms which issued the warnings – always a headache for shareholders – jumped by 66% in the first six months of this year compared to the same period in 2021.

Consultancy EY found that 136 profit warnings were issued by companies listed in London, up from 82 a year earlier.

For most it was about rising costs, with 58% citing that as one of the main reasons behind their profit misses. For others it was about workers – 19% said they were having problems in the labour market.

Many positions have gone unfilled due to a shortage of workers in recent months and this has also pushed up what companies have to pay their staff – although rarely by enough to beat runaway inflation.

“Companies are facing a myriad of headwinds that will challenge even experienced management teams,” said EY’s Alan Hudson.

“In the second quarter of 2022, we moved into yet more uncharted territory as inflation and interest rates reached multi-year highs while consumer confidence fell to record lows – all against a backdrop of geopolitical tension.

“Over the first half of this year, we have seen profit warnings prompted primarily by cost and supply chain issues, but as we start to see a fall in consumer demand and confidence, it is likely that other underlying stresses will become exposed.”

The researchers found that of 1,222 companies listed in the UK, a full 70 had issued at least two consecutive warnings in the last 12 months.

It said that one in five companies delist within a year of issuing a third profit warning, mainly due to failure.

“Businesses will need to prepare for lower growth, tighter capital and significant market volatility in the coming months,” Mr Hudson said.

“As profit warnings and stress levels rise, we’re starting to see more companies issue multiple profit warnings and a return of companies approaching the ‘three warning rule’.”

The worst-hit companies were travel and leisure firms and retailers while personal care drug and grocery stores have also suffered. These businesses were hit by rising costs, supply chain issues and staff shortages, the researchers said.

Construction companies have fared better. Their costs have risen but they have generally been able to pass this on to their customers.

Firms are meant to issue warnings when their profits are going to be considerably below what the market expects.

Naturally, share prices almost always fall in the wake of a profit warning.