The number of UK companies issuing profit warnings fell sharply in the second quarter, but experts warned there could be worse to come.
According to advisory group EY, quoted companies issued 45 warnings in the three months to June, a 40% fall on the previous quarter and a third lower than this time last year. This is the biggest quarterly percentage drop since the second quarter of 2009. A stronger-than-expected global economic backdrop and falling forecasts have combined to significantly lower warnings, according to the report.
But Alan Hudson, EY’s head of restructuring for UK and Ireland, said: “A low level of profit warnings should not lead to complacency. The reality in the market is that earnings forecasts have dipped and the economy’s relative outperformance has enabled more companies to meet already low expectations.
“Profit warnings may not rise dramatically without a shock, given that companies seem to have come to terms with passing a lower bar; but trickier conditions will catch out more companies and expose any weaknesses.”
The most warnings issued during the quarter came from retailers, citing the impact of higher inflation on consumer spending. Jessica Clayton, head of retail transaction advisory services at EY, says: “A high number of general retailers’ warnings is a red flag for the rest of the economy. It reflects weaker consumer confidence, a return to squeezed disposable incomes and rising concerns over the level of consumer borrowing.”
Seven general retailers issued warnings, followed by six software and computer services companies and six service sector businesses.
After the construction sector hit a two-year high six months ago, three further companies have issued profit warnings, with signs that political uncertainty is slowing activity and denting confidence.
Overall, a fifth of the profit warnings blamed international factors, while another fifth cited contract delays or cancellations.