UK corporate profit warnings at a three-year high as strong pound puts pressure on earnings

Out-Law News | 29 Jul 2014 | 2:46 pm | 2 min. read

Increased competition, pricing pressures and the strong performance of sterling are putting pressure on UK businesses despite the wider economic recovery, according to a new report by consultancy Ernst and Young (EY).

UK listed companies issued 137 profit warnings in the first six months of 2014; the highest total for the first half of the year since 2011, according to the firm's quarterly Profit Warnings report. Over a fifth of these warnings were triggered by adverse currency movements, while manufacturers of consumer goods made up the biggest share of companies issuing profit warnings, EY said.

"The pound's rapid rise is one of the biggest pressures on earnings, although the problem highlighted in profit warnings isn't one of sales but of currency translation," said EY's Keith McGregor. "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."

"Price and competition pressures have also intensified. While the recovery has boosted demand, it hasn't eradicated the austerity mind-set of businesses or consumers. Moreover, the low level of insolvencies means companies are competing in a packed and competitive marketplace, lowering the normal level of returns," he said.

Official figures released by the Office for National Statistics (ONS) last week showed that the UK economy returned to the level it was at before the economic crisis at the end of June, after the sixth consecutive quarter of economic growth. Official statistics on insolvencies in England and Wales between April and June 2014 also showed positive change, recording a fall in the number of company liquidations, administrations, receiverships and company voluntary arrangements (CVAs) compared to the same period last year.

However, the number of profit warnings issued by listed companies in the first six months of this year rose by 9% when compared to the same period in 2013, according to EY's report, with 63 of these occurring between April and June. Competitive or pricing pressures were cited by 19% of those businesses issuing profit warnings, compared to 7% in 2013; while adverse currency movements were cited in over 20% of cases, compared to just 3% last year.

Firms specialising in support services, software and computer services, household goods and electronic and electrical equipment issued the highest number of profit warnings between April and June, according to EY. However, the retail sector fared particularly well: general retailers and food and drug retailers issued only nine profit warnings in total over the first six months of 2014 despite a 25% increase in the number of quoted firms included in the FTSE General Retailers category.

"The FTSE General Retailers sector has already undergone a deep level of restructuring in response to relentless competition and structural change," said EY's UK head of restructuring, Alan Hudson. "The pace isn't letting up and the grocery sector looks set to face the next round. The consumers' shift to online, convenience and, above all, value-based shopping is rapidly reshaping food retail."

"Competitive pressures look set to reach a new level of intensity, with further implications for suppliers already stretched by tough conditions in developed and emerging markets. However, the major food retailers cannot squeeze their suppliers indefinitely without consequences for quality and supply. They must focus strategy beyond just price, on areas where they can compete - like range, service and convenience," he said.