How to handle a profit warning and keep calm

But the end of January also heralds the annual season of trading updates from high street retailers and other consumer focussed brands where the seasonal shopping period is so critical to their performance.

We’ve already seen reported recently in this paper a big rise in profits warnings from Yorkshire listed companies in 2018 and early indicators suggest we will see plenty more in 2019.

The big shock across global markets earlier in the year saw Apple lowering expectations due to weak Chinese sales and as we moved towards Chinese New Year a flood of Chinese companies warned that earnings would be down.

Closer to home John Lewis is considering suspending its staff bonus for the first time in 66 years due to worries about the impact of a consumer slowdown, Marks & Spencer and Debenhams have seen a fall in Christmas sales and Halfords saw their

value deflate by a quarter after a shock profits warning.

Whether you’re a high street brand or a relatively unknown AIM listed widget maker, at some stage you’re probably going to end up issuing a profit warning. The key to your ongoing success is how you manage this and how you rebuild investor confidence after the initial inevitable sell-off.

One key factor is the explanation for the unexpected change in fortunes itself and the job of rebuilding confidence starts with how the profit warning is handled. Rarely do investors welcome the sneaky profit warning – be that because it’s issued at “no-one’s looking” o’clock on a Friday afternoon, or because the bad news is buried underneath a pile of unhelpful PR fluff aimed at deflecting the reader from the grim reality.

A management team will get far more respect by putting their hands up and admitting that they need to change expectations.

In doing so it’s also imperative to give a clear explanation of why. A favourite amongst pubs, retailers and restaurants is bad weather, other reasons might be down to supply issues, increased cost of raw goods or competition eroding margins.

It might just be a matter of timing with larger contracts pushed into the next accounting period, rather than lost entirely. Maybe management have taken a decision to invest further funds to support future growth (additional staff, site capacity) therefore reducing expected profits.

A clear explanation and details of mitigating actions will go a long way to retain investor support.

The road to recovery also requires careful reconsideration of future expectations. The worst mistake is for a company to go through the same pain three or six months down the line. If you’re going to cut your forecasts then make sure you cut them to a level of comfort and not just cut in hope – this will only create further pressure and disappointment down the line. Much better to take the big hit now and then deliver future incremental upgrades to forecasts over time.

A successful strategy for regaining investor confidence is to avoid a bunker mentality.

Good communications and transparency will be essential and revised forecasts can’t be let to trickle down to a select part of the market via exclusively accessed analyst research.

Future expectations need to be made clear for all investors to see. Equally management can’t just meet larger institutional investors to update them on the situation. They need to make an effort to hold an investor evening open for all investors, not just wait for the next AGM.

It’s inevitable that the investment world will take a while to have confidence in a company following an unexpected disappointment, but good communications and clarity on forecasts will help maintain a supportive shareholder base – it might be the difference between drowning your sorrows and raising a toast now that it’s not January anymore.