Profit warnings edge up with some firms pinning blame on Brexit
The number of companies that issued profit warnings rose slightly in the third quarter of 2016, with the UK’s June vote to leave the European Union cited by almost a third as a factor in undershooting expectations.
Companies listed in the UK issued 68 profit warnings in the quarter, according to a report by accountancy firm EY – up by two from the previous quarter. Of the 68 companies that failed to meet profit forecasts, 20 cited Brexit as a contributing factor.
However, the figure was 11 fewer than the equivalent period in 2015, with EY noting that some firms' numbers have benefited from a weaker pound.
“The profit warnings that cited Brexit over the summer quarter were mostly in exposed pockets," said Alan Hudson, EY’s head of restructuring for UK and Ireland. "For most companies it has been business as usual and for some, the falling pound has been a help rather than hindrance. But the picture will change again as we start to see broader economic effects come through.”
The small quarter-on-quarter increase in the number of profit warnings should be ascribed to the “daunting level of uncertainty” facing UK companies post-Brexit, Hudson added. "This particularly affected support services businesses (including outsourcers), which can be adversely affected by uncertain conditions owing to their dependence on contract cycles. In the last year 38 support services companies – 27 per cent of the UK sector – issued profit warnings.
Other sectors under pressure included retailers, who issued the most profit warnings since the end of 2011. Retailers face headwinds ranging from pricing pressure and the need for digital investment, to the possibility of weather conditions weighing on sales.
While retailers are protected from short-term moves in sterling by currency hedging, a less valuable pound could potentially add to a generally unfavourable outlook for the sector as costs in sterling rise when purchasing materials from abroad.
These “secondary effects” from Brexit could “tighten the vice even further”, according to Jessica Clayton, head of retail restructuring at EY.
“The impact of weakened sterling may be delayed by currency hedges, but at some point something will have to give at the till – or further down the supply chain.”