UK profit warnings exceed 2008 financial crisis peak

The percentage of UK-listed companies issuing profit warnings last year hit 18.2%, exceeding the levels seen at the peak of the financial crisis in 2008, according to new findings from EY. In total, 294 profit warnings were issued across UK-listed companies in 2023, a small decrease of 11 from 2022 when 305 warnings were given. However, EY said the percentage of companies warning was still “exceptionally high” at 18.2%, higher than 17.7% at the peak of the global financial crisis in 2008. Last year, over a quarter of warnings (26%) were attributed to delayed contracts or decisions, 19% were due to increased costs and a further 19% cited the impact of higher interest rates. Some 39 listed companies issued their third or more consecutive profit warning in 12 months, representing 18% of all companies that issued a warning last year. This compares to 31 companies that issued their third or more consecutive profit warning over a 12-month period in 2022. To date, 13% of companies that warned over profits for a third or more time in 2023 have gone on to de-list. In particular, the rate of profit warnings remained high for FTSE retailers, with two in every five FTSE retailers issuing a warning during 2023. Overall, the sector issued 24 profit warnings in 2023, compared with 36 issued in 2022. EY said that retail was one of the hardest hit sectors last year as the pressure on disposable incomes remains high, meaning discretionary spending in non-food areas such as fashion continues to be impacted. Jo Robinson, EY-Parthenon partner and UK&I Turnaround and Restructuring Strategy Leader, added: “Pervasive uncertainty in 2023 created major challenges for businesses around earnings and forecasting, and this is reflected in the number of profit warnings issued last year. While pressure around costs eased somewhat toward the year-end, the uptick in warnings caused by delays to business decisions and weak consumer confidence indicates an ongoing reluctance to commit to discretionary spending. “In 2024, businesses will hope for a quicker-than-expected fall in inflation and interest rates, but many moving parts need to slot into place before we can be sure of an economic ‘soft landing’. We expect to see increasing disparity between businesses that are positioned to capitalise on still limited growth and those that are hampered by the impact of recent earnings pressures or their access to and the cost of capital. It is shaping up to be an easier year for many, but not all UK companies.” George Mills, partner and Special Situations Debt Advisory lead at EY, said: “At the end of 2023 we saw a rising number of warnings from sectors at the foundation of supply chains, like chemicals, and those reliant on business confidence, such as recruitment. Consumer spending on staples has recovered, but an elevated level of warnings in FTSE retailers highlights the persistent strain on discretionary spending. “Traditional funders will be cautious about investing in sectors with high consumer discretionary exposure. Businesses will need to demonstrate strong historical performance as well as robust forecasts capable of withstanding a future downturn if they want to refinance on the best terms. If not, they risk encountering challenges when refinancing and may have to explore other avenues for capital, such as turning to alternative lenders or seeking equity injections.”