Profit warnings highest since 2011

Profit warnings for UK companies have reached their highest first-half total in three years, according to a new EY report.

The figures show that a total of 137 profit warnings were issued in the first six months of this year, more than in any H1 since 2011 and representing a nine per cent increase year-on-year. Some 4.4 per cent of all companies issued profit warnings over the period, up from 3.8 per cent in 2013.

However, the rate of issue did level off towards the end of H1 2014. In the second quarter, there were 63 warnings issued by UK companies, 11 fewer than in the previous three months. Nevertheless, this was still nine more profit warnings than were announced in the same period last year.

It appears that companies seeking to benefit from increased consumer spending are potentially risking their margins to attract more customers. The percentage of companies that cited competition or price pressures as the biggest threat to their profits shot up, from seven per cent in the first half of last year to 19 per cent in 2014.

As a result, it may not be surprising that consumer goods manufacturers are among those suffering the most. Whereas nine per cent of firms in the FTSE Consumer Goods sectors had to issue a profit warning in the first half of 2013, that figure leapt to 16 per cent over the same period this year.

Exchange rate volatility and currency pressures have also taken their toll. EY says that “adverse currency movements” prompted more than one in five profit warnings to the end of June – much more than the three per cent recorded last year.

“The pound’s rapid rise is one of the biggest pressures on earnings,” says Keith McGregor, EY’s capital transformation leader for Europe, Middle East, India and Africa.

“Although, the problem highlighted in profit warnings isn’t one of sales but of currency translation. Recent history shows that UK exports are relatively insensitive to currency effects. However, the pound’s leap to multi-year highs has caught out a number of companies who translate foreign earnings back into pounds.”

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