Northern companies show more resilience on profits

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Northern companies are proving more resilient than the UK, as a whole, ahead of a period of post-Brexit uncertainty, a report has found.

Quoted companies in the North of England have issued 11 profit warnings in the second quarter of 2016, up slightly from the same quarter last year when 10 profit warnings were issued, but a clear improvement on 2014 figures when 15 profit warnings were issued in this quarter, according to EY’s latest Profit Warnings report.

This is in contrast with the nationwide picture where the number of profit warnings jumped to 66, from 57 in second quarter in 2015, reaching the highest level of second quarter profit warnings since 2008.

Slower than expected sales continues to trigger most UK profit warnings.

However, 11 per cent of the profit warnings nationally in the second quarter relate to the EU referendum, with companies primarily citing the impact of uncertainty on demand and the weaker pound.

EY’s report says the myriad of uncertainties means that it is too early to tell what the impact of Brexit itself will be on profits.

The North West and Yorkshire regions both issued four profit warnings in this period. The North East issued three.

Hunter Kelly, restructuring partner at EY in Yorkshire and the North East, said: “The profit warnings in the region have come from a variety of sectors ranging from retail to industrial engineering.

“This would suggest that the main focus for businesses in the region is simply to concentrate on the day job and spend time preparing for when Brexit ultimately occurs.”

The sectors with the largest number of warnings across the UK were support services, which accounted for 14 warnings, travel and leisure, which was hit by eight warnings, and general retailers, with seven profit warnings. The media industry was hit by six profit warnings in the quarter.

These sectors, along with construction and real estate, face some of the strongest headwinds from Brexit uncertainty, which have added to existing significant structural issues.

Increasing investment to meet the digital challenge features heavily in a rising number of retail profit warnings with weaker confidence and sterling also starting to bite.

“The travel and retail sectors have obvious risks from the exposure to currency changes which is the one factor from Brexit to have an immediate effect,” said Mr Kelly.

“However, the majority of the profit warnings in these sectors were pre-Brexit and related to factors such as higher wages and investment in digital infrastructure,” he added.

Mr Kelly urged businesses to see opportunities in Brexit and adapt to the new environment created by leaving the European Union. He said: “We have to approach Brexit as an opportunity. Brexit will disrupt operations and business models; but this is only a continuation of the existing pressures on business to adapt and innovate in constantly changing markets where technology disruption is becoming the norm.

“Those that demonstrate clear thinking about their priorities, build in resilience to provide a buffer for unexpected changes and take advantage of opportunities will be successful. It’s all change again, where disruption, upheaval and transformation are the norm.”

Over 40 per cent of companies who warned in the first half of 2016 have warned in the previous 12 months. Underlining the increasing polarisation between winners and losers in the recovery, EY’s report said.

There have been 321 warnings in the year-to-date from 17.4 per cent of UK quoted companies. In comparison there were 297 warnings from 18.5 per cent of companies at the same point in 2015.

Squeezed margins in retail sector add to Brexit-related uncertainty

The retail sector has been under pressure for some time with margins being squeezed by deflation, higher wages and the increasing need to invest in infrastructure.

Sales volumes in the retail sector fell in June as consumers put spending on hold.

Martin Beck, senior economic advisor to the EY ITEM Club, said: “Retail sales volumes fell in June suggesting that Brexit-related uncertainty may have finally started making 
its presence felt among consumers.

“The strength of the retail sector in April and May, however, had already pointed to some retrenchment in June.”

Mr Beck added: “Uncertainty stemming from June’s vote to leave the EU may cause some retail spending to be put on hold.”

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