Retail profit warnings fall to lowest level since 2020

UK-listed retailers issued five profit warnings in Q1 2023, marking a decrease from the nine issued in both Q4 2022 and Q1 2022, according to the latest data from EY. Despite representing the sector’s lowest quarterly total since Q4 2020, it said “persistent inflation, high interest rates and tightening consumer spending will challenge an already delicate sector”. Almost a third of listed retailers (30%) have issued two or more profit warnings since the start of 2022, well above the 8% all-sector total. Of the consumer sector companies that moved into the ‘three warning danger area’ since the start of 2022, 30% have gone into administration or have been put up for sale. Silvia Rindone, EY UK&I Retail Lead, said: “Retailers enjoyed a better-than-expected earnings season during 2022’s festive period, however this was a relative success given how far forecasts had fallen during 2022. “Almost half of the sector warned in 2022 and almost a third have issued two or more profit warnings since the start of 2022. Of the consumer sector companies that moved into the ‘three warning’ danger area since the start of 2022, 30% have gone into administration or have been put up for sale.” She added: “The economic backdrop is improving, however inflation and interest rates will continue to put a squeeze on disposable income. EY ITEM Club’s Spring Forecast reported that the UK economy is now expected to avoid both a technical recession and a calendar year contraction in 2023. While this is an improvement on earlier forecasts, a difficult backdrop for the consumer sector remains as retailers face significant working capital challenges. “Companies need to act now to understand potential cashflow pinch points and avoid a liquidity crunch by modelling different scenarios and understanding how they will affect working capital. Tough decisions will need to be made to prioritise working capital investment and conserve cash.” Nationally, UK-listed companies issued 75 profit warnings between January and March 2023, the highest first quarter total since the early stages of the pandemic in 2020. The report reveals that the number of warnings issued in the first quarter of 2023 exceeded the 72 issued in Q1 2022 and that quarterly profit warnings have remained above the 10-year quarterly average, excluding 2020, for five consecutive quarters. The highest number of Q1 warnings was in 2020, when 305 were issued. Jo Robinson, EY-Parthenon partner and UK&I Turnaround and Restructuring Strategy leader, said: “Economic forecasts may have seen some improvement in recent months, however the extraordinary strength of headwinds over the last two years has left some businesses facing recession-like conditions. This has taken its toll on business confidence and, as pressures move through the supply chain, we’ve seen a higher number of companies warning of delayed or cancelled contracts in comparison to the last quarter. “This economic uncertainty risks prolonging recovery, even as forecasts improve. Many companies may struggle to build momentum as they contend with increased working capital demands and finance costs.” She added: “We would normally expect to see insolvency activity peak nine to twelve months after a profit warning peak, so the coming year will be crucial. While the UK economy appears to be turning a corner, recovery is not guaranteed. Businesses should continue scenario planning and building solid operational and financial foundations to withstand further shocks and capitalise on growth.”