Profit warnings hit six-year high

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Published: Sunday 25th January 2015 by The News Editor

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The number of company profit warnings has surged to a six-year high despite signs of an improving economy, research showed.

The latest EY Profit Warnings survey reported 299 profit warnings in 2014, including more downgrades by large FTSE 100 firms than at the height of the financial crisis. In total there were 255 warnings in 2013.

The most vulnerable sectors were support services with 47 warnings, software and computer services with 28, followed by media companies with 16.

Throughout last year 20% of firms blamed contract delays or cancellations for profit warnings, which peaked at 27% in the final three months of 2014 as global uncertainties mounted.

The next most used reason for a profit warning was a strong pound, which impacted on goods sold abroad and was cited by 17% of firms.

Earlier this week the International Monetary Fund estimated that gross domestic product in Britain grew by 2.6% in 2014.

The report said the rise in profit warnings is more consistent with a period of low growth or global shock than an improving macro outlook.

But it added that many companies faced increasing challenges to their forecasts in recent months as a result of geopolitical unrest in Ukraine and the Middle East, falling oil prices and economic uncertainty in Europe and China.

Alan Hudson, EY’s head of restructuring for UK & Ireland, said: “The six-year high in the number of profit warnings appears incongruous given that UK and global economic outlooks still signal growth, but increasing political, policy and pricing uncertainties conspired to hit confidence at the end of 2014.”

He added: “However, many of these pressures represent new realities, rather than a passing phase. An improving macro outlook is no longer a guarantee of a smoother ride for UK plc.”

Companies within FTSE Food & Drug Retailers index issued eight profit warnings in 2014, the highest recorded since the EY Profit Warnings report began in 1999.

Over the last 12 months Morrisons boss Dalton Philips and Tesco former head Phil Clarke were ousted from their jobs as major supermarkets came under increasing pressure from discounters.

By comparison, 14% of FTSE-listed general retailers warned on profits in 2014, a record low for the survey.

EY transaction advisory services partner and retail specialist Jessica Clayton said: “The disparity is stark and has parallels to the mid-2000s, when structural changes pushed profit warnings from general retailers to record highs, whilst warnings from food retailers hit record lows.

“Arguably the grocery sector is now undergoing a similar revolution, with disruptive new entrants, online adoption and changing consumer behaviour exposing weaknesses and overcapacity and compelling exposed retailers to take radical action.”

The report said four companies in the FTSE oil and gas sector have already issued profit warnings in the first three weeks of this year, adding that the pressure was on this industry before the fall in oil prices last summer.

It said that a quarter of the FTSE oil equipment services and distribution sector warned in 2013 and again in 2014, with most of these warnings coming in the first half of the year.

Mr Hudson said: “Life wasn’t easy at 100 US dollars a barrel. The recent dramatic fall in the price of oil, if sustained, will continue to result in radical action upstream to defend returns.

“That fight was already under way and 50 dollar oil will act as a powerful catalyst. There’s little doubt that we’ll see further industry restructuring as business models adjust to new realities in activity and pricing. The industry should emerge leaner and fitter, but there’s a difficult period of adjustment to come.”

The report concluded that firms face a challenging 2015.

Mr Hudson said: “It’s been a breathless start to 2015, full of surprises and volatility. The underlying forecast is for improved, albeit below par, growth, boosted by cheaper oil.

“However, the low oil price isn’t without complications and it’s not enough to compensate for weaknesses elsewhere, which look set to dampen confidence and limit global investment and consumption yet again.

“This mixed global outlook – and a relatively strong pound – will leave the UK economy once again reliant on domestic momentum in 2015.”

Published: Sunday 25th January 2015 by The News Editor

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