Profit warnings reach six-year high


Published: Sunday 26th October 2014 by The News Editor

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Profit warnings by UK-listed firms have risen to their highest summer level in six years as more businesses are squeezed by competitive price pressures.

EY’s report said quoted firms issued 69 profit warnings in the third quarter of the year, compared with 56 warnings for the same period 12 months ago. It is highest level for the three-month period to September 30 since 2008.

Supermarket Tesco and fashion chain Next both warned on profits during the period, as r etailers issued their highest number of warnings since 2011.

The worst-performing sectors were support services with 10 warnings, software and computer services on six, and construction and materials and media, both on five.

The survey said despite a rise in economic output, firms faced crowded and competitive markets, while bargain-hunting customers, rapid structural change and until recently a strong pound also hampered progress.

Six retailers issued warnings in the period, up from two in the second quarter, the highest in three years.

The report said even though retail sales rose throughout most of the summer, the sector and supermarkets in particular face big changes.

EY head of restructuring for UK & Ireland Alan Hudson said: “New entrants, new technologies and shifting consumer behaviour continue to challenge established business models and nowhere is this more visible right now than in food retailing.

“The pressure on sales and margins is largely focused on established supermarkets, struggling to adapt to the move away from the big weekly shop and the challenge posed by an expanding group of warehouse, supermarket and high street discounters.”

The survey said the construction and materials industry issued a high number of warnings because older contracts have come under intense margin pressure due to costs rising in a recovering economy.

The five warnings in the construction and materials sector were its highest total since the second quarter of 2012.

Mr Hudson said: “Contractors have found themselves in a ‘perfect storm’ of low-margin legacy contracts and rising costs. During the recession, many contractors priced aggressively in response to competitive pressures and the need to at least to cover their overheads and retain critical mass for better times.”

It said in the 12 months to the end of third quarter 23% of companies warned on profits more than once, which is only just above the calendar year average of 22%.

EY capital transformation leader for Europe, Middle East, India and Africa, Keith McGregor, said: “Profit warnings have continued apace from the third into the fourth quarter.

“This implies that at best companies and markets are misreading the post-crisis economy and are struggling to adapt to rapid structural changes, and at worst have once again over-estimated the pace and nature of this recovery.”

Published: Sunday 26th October 2014 by The News Editor

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