Rising inflation triggers biggest wave of profit warnings since the financial crisis
by Shawn Johnson October 24, 2022 in News
Rising inflation triggers biggest wave of profit warnings since the financial crisis
City of London
The surge in cost of living is inflicting the biggest pain on businesses since the financial crisis, as a number of companies rave about their profits to a 14-year high.
New figures from EY-Parthenon show that UK-listed companies had 86 profit warnings in the three months to the end of September, more than two thirds from last summer and the highest level for the period since 2008.
The data shows that 28 listed companies are in the “danger zone”, which have warned about profits thrice in the past one year.
Typically, the fifth business that issues three profit warnings either falls into administration or is snapped up within a year of the third warning.
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A separate survey from Deloitte showed that consumer confidence fell to the lowest level since records began in 2011, falling to -20 pc for the fifth quarter in a row. Consumers said they were spending less, worried more about debt, and were almost as concerned about the macroeconomic outlook as at the start of the COVID pandemic.
A fifth said they were selling used items to raise cash.
Meanwhile, another survey conducted by accountants BDO found that a fifth of medium-sized companies believe the current crisis will be more challenging than the COVID pandemic, Brexit or the 2008 banking crash.
Rising energy costs and the risk of winter blackouts were top concerns for 43 percent of the 500 business leaders surveyed. A fifth said they were taking on more debt to cope, and about half expect prices to rise in the next three months.
It comes amid reports that Citi Watchdog is asking private equity firms about rising interest rates after years of bargaining because of cheap loans.
According to the Financial Times, Financial Conduct Authority officials are in talks with several large firms about the impact of the market turmoil after last month’s mini-budget.
It is believed that many players have yet to cut valuations of companies in response to the global economic slowdown, and this could have an impact on pension funds, which are investors in private equity.
On the public markets, EY restructuring expert Joe Robinson said there was a significant increase in companies issuing their third or more warnings in a 12-month period.
Among them are retailers such as furniture seller Made.com, which is grappling with a slowdown in demand for big-ticket purchases, and electricals business AO World, which recently warned sales would be hit by rising prices. Made.com has been forced to offer itself for sale, while AO said this summer it was seeking a £40m cash injection from investors.
Ms Robinson said British businesses are facing “an unprecedented combination of headwinds including rising costs, slowing demand and excess supply, making it difficult to balance competing priorities”.
Retailers and food producers in particular are struggling with this balance, as buyers begin to trade in for cheaper alternatives. Data from EY-Parthenon shows that over 40 per cent of the retailers listed on the FTSE have issued profit warnings in the past 12 months.
Of the 86 profit warnings issued in the three months since September, 57 pc cited rising costs as a factor.
Several businesses have attempted to offset this through price increases, including KitKat maker Nestle, which has pushed its fastest price hike in decades. Heinz and Tesco, meanwhile, were locked in a row earlier this year over earlier attempts to raise prices for products including baked beans.
These increases are prompting more shoppers to do their weekly grocery store at cheaper supermarkets and buy more self-brand options for the big names.
A recent study by Kantar found that Lidl was the fastest-growing grocer, followed by rival discounter Aldi. According to Kantar, sales of its own branded products in supermarkets grew 8.1 percent last month, while sales of branded items declined by 0.7 percent.
Buyers are seeking to reduce spending as a bleak winter looms in other regions. Separate figures recently suggested that consumers were planning to spend £4.4bn less this Christmas on non-essential items, especially shoes and clothing.
Online retailer Asos launched a major survival plan last week to reduce costs, warning it was experiencing an “incredibly challenging economic environment.”
EY’s UK retail lead Sylvia Rindon said it was important that retailers use the breathing space provided by the government’s energy price cap “to protect their long-term existence”. This may mean increasing your costs to customers with minimal to no cost.
However, she said there was also a polarization in retail, with “cash-strapped consumers looking at every penny and those willing and able to spend” to entice retailers. She said retailers would have to “adapt to changes in consumer behaviour”.
