Profit warnings drop to 20-year low

UK publicly-listed companies issued the lowest level of profit warnings in more than 20 years during the first quarter, but investors should be wary of the challenging outlook for businesses.

Profit warnings were pushed to record levels during the first quarter of 2020 at the onset of the pandemic, according to EY-Parthenon’s latest Profit Warnings report, but began to fall from the middle of last year and numbered just 50 during the first three months of the year.

Most FTSE sectors saw significant falls in profit warning numbers at the start of 2021, as the global vaccine roll-out bolstered the economy and earnings forecasts, according to the report.

However, the continued withdrawal of forecasts by 15% of FTSE 350 companies indicates ongoing uncertainty.

Perhaps unsurprisingly, the FTSE sectors issuing the most profit warnings in Q1 2021 were retailers (eight) and travel and leisure (five). When measured by the percentage of companies in a sector issuing a warning, the top FTSE sectors were beverage (22%), personal goods (20%) and retailers (17%).

A total of 64 listed companies have issued at least their third profit warning in a 12-month period since the start of March 2020, according to EY-Parthenon.

None of these companies have entered administration, in contrast to the 15-20% figure EY-Parthenon says it would normally expect to see doing so within a year of their third warning.

Alan Hudson, EY-Parthenon UK&I turnaround and Restructuring Strategy Leader, said: “Low levels of profit warnings are an indication of a temporary breathing space for companies. If they haven’t already, this is a time for UK business to reset and ready themselves to rebuild.”

“The impact of the pandemic won’t automatically reverse when lockdown ends,” he added. “For many businesses, pressures will intensify as they restart operations, government support tapers, and working capital becomes stretched.”