Profit warnings leap as economic uncertainty takes its toll

Analysis by Ernst & Young revealed a 70pc leap in the number of profit warnings, from 51 in the third quarter to 88 in the final quarter, marking the biggest jump in a decade. During the year as a whole, there were 278 profit warnings, compared to 196 the previous year.

Warnings in the quarter from the likes of retailer Mothercare and Premier Foods, the maker of Mr Kipling cakes, pushed the proportion of listed companies who put out warnings in 2011 up to 14pc, the highest since the financial crisis first started in 2008.

As cash-strapped customers curbed their spending, retail was the worst-hit sector, with 39 profit warnings issued last year, more than the whole of 2009 and 2010 combined.

But Alan Hudson, head of Ernst & Young’s UK restructuring practice, said that although consumer-facing sectors had been hit hard by the sharp fall in disposable income, there were still successful companies across these sector that were performing well.

“Shoppers are still willing to splash out on items or experiences that they value, but the pressure on consumers’ coffers means if they are spending more to create winners in one area, there will inevitably be losers in others,” he added.

Although the high street’s travails have grabbed headlines, the pain is also being felt across many other sectors. Last year, the software and computer services sector issued 31 warnings, the highest number since 2008, with a fifth of the sector cautioning on profit during the course of 2011.

“Both are highly reliant on the vagaries of spending in their end markets - primarily business and the public sector – and both are therefore highly sensitive to rising levels of uncertainty or falling levels of activity in the broader economy,” said Mr Hudson.

“This sensitivity can make both industries useful bellwethers and the sharp rise in profit warnings in both sectors at the end of 2011 was certainly indicative of a changing economic outlook.”

He added that the sharp rise in warnings across all sectors demonstrated that 2011 was a tough year for companies and that the new year was likely to continue in the same vein with the gap between the winners and losers widening.

“Many businesses are still expanding profitably, but others – the zombie companies – remain moribund by debt or defunct business models, unable to build value or gain momentum in these challenging economic conditions,” he added.

Profit warnings in the first weeks of the new year have come primarily from companies vulnerable to contract and order cancellations, as customers wait for more economic certainty before committing to further significant outlays, said Mr Hudson

“Companies in industrial, IT and support services sectors have proved vulnerable to contract delays in the past and further profit warnings are likely from these sectors until the political and economic outlook stabilises,” he added.

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