Recent profit warnings spark ‘crisis levels’ of share price drops at UK firms

Half of retail companies that issued warnings in the third quarter cited the warm weather as a reason for financial difficulties

UK companies that warned on profits in the third quarter of this year saw their share prices drop at a rate last seen during the financial crisis – in a “worrying sign for the economy”, according to EY.

Listed firms issued 68 profit warnings in the third quarter, seven fewer than the same period of 2017, but stocks dropped by an average of 21 per cent. EY said this was “comparable to figures seen 10 years ago at the height of the financial crisis”.

Meanwhile, the percentage of quoted companies issuing warnings in the last 12 months has increased to 15.6 per cent (206) compared with 14.4 per cent (191) a year ago, according to EY’s latest profit warnings report.

General retailers including Debenhams and Dunelm made the highest number of warnings, issuing eight during the quarter, and a third of the sector have warned over profits in the year so far. Half of the retailers doing so in the third quarter cited the warm weather as a reason.

Alan Hudson, EY’s head of restructuring for UK & Ireland, said: “Retailers have contended with a year of weather extremes and the summer sun has benefited some, but burnt others.

“Looking ahead we anticipate one of the most demanding ‘golden’ quarters leading up to Christmas trading in many years. If 2018 follows the pattern of recent years, consumers will hold back spending from now until Black Friday, which could result in heavy discounting to drive sales.”

EY also noted that profit warnings are starting to “spread back into industrial and financial segments of the economy”, with support services making seven warnings and financial services issuing six.

Mr Hudson added: “Increasing capital market volatility and crisis-level investor reaction to profit warnings underlines a growing market concern about what comes next and how ready companies are to face the unknown.

“With so much of the UK and global economic and political outlook on the line, investors clearly want to be backing the fittest, most agile companies.”

The travel and leisure sector saw warnings in Q3 rise to their highest level in two years due to the “intense fight for disposable income in often oversupplied and highly competitive markets where margins are accordingly tight”, he said.

Mr Hudson also said that while companies “can’t predict every storm... they can focus on building contingency plans that address their biggest pinch points”.

“Those with flexible operating and cost structures that can adapt quickly to changing market conditions, coupled with strong liquidity, will be better placed to ride out the storm,” he added.