2019 Yorkshire profit warnings down by a third, bucking UK trend

Hunter Kelly

Profit warnings issued by listed businesses in Yorkshire and the North East, decreased by 33% year-on-year, deviating from the UK trend, according to EY’s latest quarterly Profit Warnings report.

Twenty-six warnings were recorded in the region by EY last year, a 33% year-on-year decrease, compared to 2018 (39 warnings). 73% (19) of the profit warnings were issued in the first six months of year, compared to seven warnings between July and December.

In sharp contrast, profit warnings issued by quoted companies across the UK rose by 9% (313) year-on-year (287 in 2018) to reach the highest annual total of warnings since 2015. Particularly striking is the proportion of UK-listed companies warning in 2019 (17.8%), which marginally surpassed 2008 (17.7%), to reach an 18-year high – in 2001, the figure was 22.7%.

In Q4 2019, 22% of UK profit warnings blamed ‘political uncertainty’ and over a third pointed to delayed or cancelled contracts.

Hunter Kelly, Restructuring Partner at EY, said: “2019 was a challenging year, full of twists and turns that undoubtedly contributed to a remarkably high level of profit warnings in the UK. Volatile domestic and geopolitical uncertainty delayed corporate decision making and hit demand.

“We also saw evidence of investors pricing in concerns that there was more to come when a company issues a profit warning as the median share price fall on the day of warning dropped to a two-year low.

“Yorkshire businesses are perhaps ahead of the curve in adjusting their earnings, which will certainly stand them in good stead for 2020. In comparison to the national picture, it is striking that warnings in the region declined from 17 in the first half of 2019 to just seven in the second half.”

Impact of uncertainty on corporate decision making

Much has been made of the testing market conditions and rapidly changing consumer behaviour and sectors relying on consumer discretionary spend were hardest hit in 2019. However, consumer-facing sectors were not alone, and contractors also issued a high level of warnings, faced with a combination of systemic low margins and the cyclical impact of uncertainty on corporate decision making.

FTSE Industrial Support Services and FTSE Software & Computer Services each issued 25 warnings in 2019, while warnings from FTSE Construction & Materials recorded a seven-year high.

Kelly said: “The one constant has been uncertainty for the UK economy since 2016 and this clearly escalated in 2019 through a succession of Brexit ‘no-deal’ deadlines and a General Election, with the consequent hiatus in government spending decisions and corporates putting off key decisions.

“Looking forward, December’s decisive UK General Election result has lessened domestic political uncertainty and has already unlocked some decision making and raised hopes of increased government spending.”

Another bruising year for retailers

In 2019, UK retailers experienced another bruising year and a challenging Christmas. For the second year in a row, a third or more of the UK FTSE Retailer sector issued a profit warning, despite disposable incomes rising over the last 12 months.

Kelly added: “Weak consumer confidence, rising costs and intense promotional activity have created an exceptionally tough climate for retailers, who are constantly having to adapt to rapidly changing shopping habits.

“Post-Christmas trading updates once again underlined the winners are the retailers that create a compelling, engaging online and store offering for their target market while keeping the costs of operation under control.”

2020 outlook

Kelly concludes: “Easing political tensions and promises of UK fiscal expansion could help companies beat potentially depressed expectations in 2020 but underlying stresses and tensions mean that there is still vulnerability and profit warning numbers could remain at high levels in the UK.”