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Highest level of profit warnings issued by UK-listed companies for six years

UK-LISTED companies issued their highest number of third quarter profit warnings since 2008, according to a new report from EY.

It showed that quoted companies issued 69 profit warnings in Q3 2014, the highest third quarter total since 2008 and 13 more than the same quarter of 2013.

Retailers issued the highest number of warnings over the summer since 2011 – typified by Tesco and its succession of announcements that has seen its value halve in a year.

Alan Hudson, EY’s head of restructuring for UK & Ireland, said: “New entrants, new technologies and shifting consumer behaviour continue to challenge established business models and nowhere is this more visible right now than in food retailing.

“The pressure on sales and margins is largely focused on established supermarkets, struggling to adapt to the move away from the big weekly shop and the challenge posed by an expanding group of warehouse, supermarket and high street discounters.

“This group met consumers’ austerity needs in the recession and have succeeded in resetting their value expectations in the recovery.”

The report says that behind the headline rise in demand, companies face crowded and competitive markets, savvier customers and rapid structural change, as well as a strong pound.

In the 12 months to the end of Q3, nearly a quarter (23%) of companies issuing a warning did so more than once – just above the calendar year average of 22%.

In the first nine months of 2014, 21% of profit warnings cited competitive or pricing pressures -triple that for the same period in 2013 (7%). A rise in the number and percentage of companies citing currency in their profit warning – up from 14% in Q2 to 22% in Q3 – was also indicative of forecasting challenges.

The FTSE sectors issuing the highest number of profit warnings in Q3 2014 were support services, software & computer services, followed by construction & materials and media, demonstrating highlighting the pricing and competitive pressures faced by the contract-reliant.

The construction and materials sector issues more warnings in 2014 than whole of 2013.

Despite this it continued to recover in 2014. But much of the sector came under severe margin pressure in spite of – and in some instances because of – the strong recovery.

Hudson added: “Contractors have found themselves in a ‘perfect storm’ of low-margin legacy contracts and rising costs. During the recession, many contractors priced aggressively in response to competitive pressures and the need to at least to cover their overheads and retain critical mass for better times.

“These contracts are now coming under severe pressure as labour, materials and subcontractor costs rise, leaving some specialist contractors vulnerable to further shocks and margin pressures.”

Keith McGregor, EY’s capital transformation leader for Europe, Middle East, India and Africa, said the recovery wasn’t returning companies to the halcyon days enjoyed before the current crisis began:

“Profit warnings have continued apace from the third into the fourth quarter. This implies that at best companies and markets are misreading the post-crisis economy and are struggling to adapt to rapid structural changes, and at worst have once again over-estimated the pace and nature of this recovery.

“Slower global growth, lower inflation, lower wage growth and lower interest rates are likely to be around for some time. Companies cannot passively hope for a rising economic tide to float their profits.

“The recovery isn’t returning us to the pre-crisis economy. Companies are finding this a tough economy to grow sales and margins, and a tough economy to read, as this latest rise in profit warnings indicates.”

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