The number of profit warnings issued by South West companies halved in 2021 while the rest of the UK saw them increase - with the staycation boom in the region’s hospitality sector being cited as a reason.
The latest Profit Warnings report, from global business consultancy EY-Parthenon, revealed that 19 profit warnings were issued by South West listed businesses in 2021.
This is half the number of profit warnings issued in 2020 and Q4 of 2021 also saw a 12% decrease year-on-year in the number of profit warnings issued in the region.
The swift recovery in the retail and hospitality sectors, driven by a staycation boom in the South West, are being seen as a key potential factor because the nation saw profit warnings rise overall. But EY is warning that supply chain disruptions and rising costs mean there could be challenges ahead in 2022 for the region’s firms.
Lucy Winterborne, head of turnaround and restructuring strategy at EY-Parthenon in the South West and Wales, said: “Listed businesses operating in the South West’s key sectors – including manufacturing, retail, and hospitality and leisure – have found the past two years particularly challenging thanks to disruption caused by the global pandemic and Brexit.
“Last year saw some respite for these sectors as restrictions eased compared to 2020 and consumers took the opportunity to enjoy staycations.
“This, alongside a more modest approach to forecasting, may have accounted for a reduction in the number of profit warnings being issued by South West listed businesses.
“However, the outlook is that businesses in the region will continue to face uncertainty due to ongoing supply chain issues and labour shortages.
“It’s likely that the next 12 months will see fresh challenges for listed businesses in the South West. Some may choose to continue to delay and alter their investment decisions, while others could look again at internal structures and undertake further business transformation projects.”
Nationally, profits warnings have been increasing. Across the UK as a whole, profit warnings issued by UK listed companies increased by 19% year-on-year in Q4 2021.
In the final quarter of 2021, UK listed companies issued 70 warnings, up 19 (37%) from the 51 issued in Q3, with a record 44% of those warnings blaming supply chain disruption, compared to just 2% between 2009 and 2019, and a further 27% citing rising cost pressures.
In total, 203 profit warnings were issued in 2021, down from the record-breaking 583 warnings witnessed in 2020 and the second lowest by number since EY began tracking warnings in 1999.
The low total is due to the strong post-lockdown rebound and exceptionally low levels of profit warnings in the first half of the year, which gave way to extensive supply chain disruption and rising costs in the second.
Ms Winterborne said: “Sporadic growth made it a difficult year for many companies to navigate, despite healthy headline figures. By the second half of the year, an increasing number of companies nationwide were issuing profit warnings as forecasting and earnings challenges evolved and multiplied.”
EY-Parthenon’s report found one-in-five listed consumer-facing companies issued a warning over the past year. The hardest hit sectors were FTSE Aerospace & Defense with 57% of companies issuing a warning in 2021, followed by FTSE Personal Care, Drug & Grocery Stores (39%) and FTSE Retailers (34%), all of which experienced supply chain headwinds in the second half of the year.
However, not all profit warnings were due to supply chain issues. The FTSE Software & Computer Services sector issued 11 warnings in H2, the joint highest for any sector along with FTSE Retailers.
Ms Winterborne said: “Nationally, the biggest driver of warnings in 2022 is likely to be the rise in inflationary pressures and its impact on disposable incomes and margins. We have already recorded profit warnings relating to rising energy prices. Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare – including care homes.”
She added: “We expect to see more restructuring activity in 2022 as the last Government support measures fall away and businesses feel the full force of, not only economic and structural pressures, but the increasing focus on Environmental, Social, and Governance (ESG) metrics, as funders increase their focus on supporting ‘sustainable’ businesses. The ability to demonstrate purpose and long-term value has never been so vital.”
