Snapping supply chains triggers wave of profit warnings

Supply chains snapping, soaring energy costs and the ongoing labour squeeze has crimped listed companies’ profits.

The number of profit warnings issued by UK listed companies in the last three months climbed to 51, up sharply from 19 in the second quarter of this year, research by EY-Pantheon has found.

Elevated profit warning levels have been driven by severe supply chain disruption swelling companies’ costs and eating into their margins.

Despite the resurgence in spending in the immediate aftermath of the Covid-19 unlocking boosting firms’ bottom lines, supply chains have buckled under the weight of demand suddenly switching back on after months of pandemic-induced lockdowns.

43 per cent of companies said supply chain breakdowns were the reason for issuing a profit warning, EY-Pantheon said.

Sectors that have yet to experience a full recovery in demand, such as travel and airline, are most at risk of suffering from cost pressures and the end of government support measures.

Alan Hudson, turnaround and restructuring partner at EY-Parthenon, said: “Over the last 18 months, government support has mitigated the impact of massive changes in the UK economy.

“These measures have now come to an end and the remainder of the year will reveal those surviving on life support, as the government removes most, but not all of its props.”

Consumer-facing firms led total profit warnings higher, issuing 11 in the last quarter, reflecting this sector’s heavy exposure to higher energy costs and labour shortages.

EY-Pantheon thinks distress in the energy sector is likely to intensify in the coming months, culminating with the number of UK energy suppliers to shrink to under 20, down from 70 at the start of 2021.

“We expect the gaps to widen between and within sectors, depending on companies pricing power, their agility and capacity to adapt and capitalise on changing behaviours, and their ability to build a sustainable long-term value story,” Hudson added.

Nearly two-fifths of companies’ profit warnings were driven by the ongoing impact of the Covid-19 crisis, down significantly from 72 per cent in the previous quarter.