The first quarter of 2022 has seen a record number of cost and supply chain profit warnings as companies face ‘crisis as normal’, with the retail sector topping the number of warnings.
The number of profit warnings issued by UK-listed companies in the first quarter of 2022 increased 44% year-on-year, with a record number of warnings citing rising costs as increased commodity and energy prices fuel inflation, according to the latest EY-Parthenon Profit Warnings report.
It showed that UK-listed companies issued 72 warnings in Q1 2022, the highest quarterly figure since the second quarter of 2020 at the start of the pandemic. A record-breaking 43% of warnings were due to rising costs, up from 27% in Q4 2021 and well above the 2011-2021 average of 10%.
FTSE retailers issued the most warnings in the first quarter of the year (9 in total) – the highest quarterly total since the start of the pandemic and accounting for 17% of all listed retailers. Over one-third of FTSE retailers (34%) have issued a warning in the last 12 months.
The sector has been affected by supply issues with 67% of retail warnings citing supply chain disruption, 75% blaming increased costs and over half (56%) revealing staffing issues in the last six months. Consumer sector profit warnings look set to remain high as the ability to pass costs on depends on the capacity of increasingly pressured consumers to absorb them.
Silvia Rindone, EY UK&I retail lead: “Our data underlines the challenges ahead for UK retail. The sector’s problems so far have been largely on the supply – rather than demand – side. Companies will now be facing a combination of supply chain, cost, and demand headwinds, as the rise in the cost-of-living affects real incomes and creates a challenge for the sales growth that has helped drive the recovery so far.
“It is vital that companies respond to consumers’ concerns. Our latest Future Consumer Index revealed that more than two-thirds of UK consumers are worried about their finances. So, we expect significant ‘trading down’, as we saw in the last financial crisis, but we also expect an increasing focus on ‘value for money’ options as sustainability-conscious consumers look for purchases that will last. Retailers will also need to focus on operational resilience by creating clear inventory visibility and a strong cash culture to minimise costly write-offs and optimise working capital to ensure they have the capital necessary to focus on growth and transformation. Digital opportunities and consumer expectations will continue to grow, regardless of the economic backdrop.”
Across all FTSE sectors, 11% of warnings cited the impact of the war in Ukraine, with most referencing the impact of sanctions and withdrawal from Russian markets. Meanwhile, supply chain challenges eased slightly in Q1 2022 with 22% of listed companies issuing a warning referencing this issue.