UK Retail Sector Faces Challenges Despite Decrease in Profit Warnings in 2023, EY-Parthenon Report Reveals

In a recent report by EY-Parthenon, it has been disclosed that companies listed in the UK FTSE Retailers sector issued 24 profit warnings in 2023, marking a notable decrease from the 36 issued in the previous year. However, despite this improvement, the retail sector still grapples with challenges, with 40% of FTSE Retailers issuing profit warnings in 2023. The report identifies high interest rates and wavering consumer and business confidence as key drivers behind these warnings.

Trends in the FTSE Retailers Sector:

The FTSE Retailers sector experienced a decline in profit warnings in 2023 compared to the previous year, with 24 warnings issued. This signifies a one-third reduction from the 36 warnings in 2022. However, the report points out that the retail sector continued to face difficulties, especially towards the end of 2023, as events such as Black Friday and post-Christmas sales failed to boost sales volumes. Fashion retailers were particularly affected, contributing to over half of the warnings issued during this period.

On the positive side, the FTSE Personal Care, Drug, and Grocery Stores sector, which includes supermarkets, saw a significant improvement. It issued only three profit warnings in 2023, down from 16 in 2022, with food sales rising by 6.8% in the three months to December.

Factors Influencing Profit Warnings:

Silvia Rindone, EY UK&I Retail Lead, highlighted that despite a relief in disposable incomes, consumers are exercising discretion in retail purchases. Ongoing concerns about inflation, high interest rates, and elevated energy costs continue to put pressure on consumer discretionary spending. Rindone also emphasized that cost pressures remain high for retailers, with further challenges expected in April due to the proposed increase in business rates and ongoing geopolitical disruptions affecting supply chains.

National Overview:

The report reveals that nationally, the percentage of UK-listed companies issuing profit warnings in 2023 exceeded levels seen at the peak of the 2008 financial crisis, reaching 18.2% of public firms. Although the total number of warnings decreased slightly from 305 in 2022 to 294 in 2023, the percentage of companies issuing warnings remained exceptionally high. Over a quarter of warnings were attributed to delayed contracts or decisions, 19% to increased costs, and another 19% to the impact of higher interest rates.

Q4 2023 and Outlook for 2024:

In the final quarter of 2023, 77 profit warnings were issued, a slight increase from the previous quarter. While cost pressures seemed to ease towards the end of the year, corporate spending delays and higher interest rates became growing concerns, contributing to 24% of profit warnings in H2 2023. Smaller companies dominated warnings at the start of the year, but by Q4, larger companies with annual revenues over £1 billion accounted for a third of the warnings.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, noted that pervasive uncertainty in 2023 created challenges for businesses around earnings and forecasting. Looking ahead to 2024, businesses hope for a quicker-than-expected fall in inflation and interest rates, but uncertainties persist. The report suggests that the year ahead may bring increasing disparity between businesses poised for growth and those hindered by recent earnings pressures or challenges in accessing capital. Overall, while 2023 witnessed a decrease in profit warnings, the retail sector continues to navigate a complex landscape.


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