Three listed companies in Scotland issued profit warnings in the third quarter of 2017, compared with two in the previous quarter and three in the same period last year.
According to EY’s latest Profit Warnings report, this steady level of warnings is in contrast with the rest of the UK where figures have fluctuated significantly with the unpredictable economic climate cited as a factor.
A total of 10 profit warnings have been issued by Scottish businesses so far this year, representing a five-year low for the first three quarters.
Across the UK, profit warnings have seen the biggest quarterly rise in almost six years. UK quoted companies issued 75 profit warnings in Q3 2017, significantly above the average levels of warnings (62) for a third quarter and up from the 45 issued in Q2.
According to the report, the high number of profit warnings exposes a growing divergence between those sectors of the UK economy more exposed to domestic pressures and those benefiting from growth in overseas markets. The FTSE sectors issuing the most profit warnings in Q3 2017 were: Support Services (13), General Retailers (8), Software & Computer Services (5), and Travel & Leisure (5).
Pricing and cost pressures feature in 25% of all profit warnings so far in 2017, compared with 18% in 2016. According to the report, these pressures are especially apparent on the consumer side of the economy. In 2017, 39% of FTSE General Retailers and 59% of FTSE Travel & Leisure warnings have cited rising costs or price pressures. Keeping up in competitive and fast moving markets is compounding margin pressures, with 13% of warnings this quarter also citing unexpected investment costs.
Colin Dempster, EY’s head of restructuring for Scotland said: “The contrast between accelerating overseas markets and the continued slowing of the UK economy has delivered mixed results for businesses across the UK. Many that faced intensified pressure on prices prior to Brexit are also now dealing with rising domestic uncertainty and costs. The increase in warnings at a UK level could be an indication of companies being caught on the wrong side of economic and digital trends.
“The profit warnings figures for Scotland in 2017 to date have been relatively steady which could be an indication of greater resilience in Scottish businesses, aided by a more stable oil price. Companies that can read the landscape well will continue to thrive and it will be increasingly important for all businesses to be agile and adapt to change.”
Wider UK trends
Retailers face tightened purses
FTSE General Retailers’ warnings hit their highest third quarter total since 2008 in Q3 2017 with eight warnings and 31% of the sector warning in the year-to-date. Home improvement retailers make up almost half of retail warnings in the last six months, an early warning of falling confidence and increasing pressure on discretionary spend, according to the report.
Restaurant and travel sectors set for testing times
According to the report, profit warnings from the FTSE Travel & Leisure sector fell back from their peak of eight in Q1 2017 to four in Q2, edging back up to five in Q3. However, one-fifth of all FTSE Travel & Leisure companies have warned in the past year and the data shows a substantial increase in warnings from the Restaurants & Bars sector, while a number of airline failures have also put the sector back in the spotlight.
In both cases, the biggest issues are the impact of oversupply and rising costs for businesses that are already struggling with thin margins. Almost 60% of all FTSE Travel & Leisure companies warning have cited rising costs and pricing pressures in 2017, according to EY’s report.