FTSE profit warnings fall to three-year low

The number of profit warnings announced by British firms fell to a three-year low in 2013, according to an EY survey.

But a spike of bad warnings in the final quarter rivalling the height of the global financial crisis was a “bitter twist”, the accounting giant says.

The London Stock Exchange main markets and AIM companies issued 255 profit warnings in 2013 compared with 287 the previous year, EY’s latest Profit Warnings report shows.

Companies in the FTSE 350 gave 31 warnings in the fourth quarter, the same number as the final quarter of 2008.

Overall, LSE-listed companies announced 73 profit warnings in the three months to December, a 30 per cent jump on the previous quarter.

Most of the fourth quarter’s bad news emanated from support services firms that were exposed to natural resources markets and the US government shutdown, while consumer-facing sectors were the least affected.

Support services – the FTSE’s largest sector – had 14 profit warnings and software & computer services had seven, while aerospace & defence, media and technology hardware & equipment had five each.

EY capital transformation leader for Europe, Middle East, India and Africa Keith McGregor says the fourth quarter spike “seems incongruous” with the improving economic data.

“But global growth anxieties reduced profit expectations in late summer, with earnings downgrades continuing into the final quarter of 2013,” he adds.

McGregor expects the number of profit warnings to fall again this year, although perhaps not as much as the recovery might suggest.

“The year has started with a faster pace of alerts than 2013, with companies still feeling the impact of slower global markets, with the added complication of weaker currency translation as sterling strengthens in anticipation of higher UK interest rates,” he explains. 

Increasing activity and better economic conditions will not guarantee fewer profit disappointments, says EY UK and Ireland head of restructuring Alan Hudson.

FTSE support services companies are issuing high numbers despite buoyant industry surveys, he says. Almost a quarter of the sector’s constituents gave lower than expected profits in 2013. 

“Volumes may be increasing, but public and private sector alike are keeping a tight control on costs, resulting in tight margins, intense competition and little room for error for many in the sector,” he explains.

Consumer-facing sectors benefited from the consumer and housing revival.

FTSE general retailers gave a four-year-low of nine profit warnings last year, a massive turnaround from the FTSE-topping 39 in 2011.

“It was a mixed Christmas for retailers, with a broad spectrum of results,” Hudson says.

Many retailers reported much-improved sales, with overall sales up, albeit helped by dampened expectations engendered by weak surveys, he adds.

“However, trading statements also tell a story of a bruising Christmas for retailers who didn’t get their proposition and strategy right,” he says.

“The winners generally had one or more of three linked elements: they held their nerve on pricing, they balanced bricks and clicks and they hit the ‘value for money’ or brand sweet spot.”