In total, 86 profit warnings were issued between July and September 2022, compared to 51 in the same period of 2021, an increase of 69% and a 34% increase from Q2 2022 when 64 warnings were issued. The highest number of Q3 warnings was in 2001 when 133 warnings were issued.

The rise in warnings has been driven by a significant increase in the number of warnings from consumer-facing companies, which rose almost three-fold year-on-year. The report reveals that 57% of warnings during Q3 cited rising costs, while 23% were prompted by labour market issues.

The three warning ‘danger zone’ now contains 28 listed companies who have issued their third consecutive profit warning in the last year, compared to 18 at the end of Q2 2022. On average, one-in-five companies delist within a year of their third warning, most due to insolvency.

Jo Robinson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, said: “Businesses are facing an unprecedented combination of headwinds including rising costs, slowing demand and excess supply, making it increasingly difficult to balance competing priorities.

“This quarter, we have seen a significant increase in companies issuing their third or more warning in a 12-month period. With so many uncertainties in the outlook it’s vital that companies develop resilience and demonstrate a clear understanding of how their business will adapt under different geopolitical and economic scenarios.

“Increasing uncertainty means that events could move quickly for companies that show signs of stress – turning the situation around requires a swift response, sustainable and defendable forecasts, and the building of stakeholder trust in management.”

Consumer-facing sectors most affected

Consumer-facing companies issued 44 warnings in total – the highest quarterly total since the start of the COVID-19 pandemic. Sectors with the most warnings in Q3 2022 were Retailers (11), Travel and Leisure (nine) and Food Producers (seven) – with the latter sector at a 21-year high.

Cost issues featured in 70% of all consumer-facing sector warnings with many companies saying that they are struggling to pass on price increases to customers, while falling consumer confidence and changing buying behaviour featured in 50% of warnings.

FTSE Retailers facing multiple headwinds

Over 40% of FTSE Retailers and over 60% of the FTSE Personal Care, Drug and Grocery Stores sector issued a profit warning in the last 12 months.

Both sectors, which were already facing spiralling cost, supply chain and labour challenges, are now also contending with falling consumer confidence. Over 70% of retailers issuing a warning in Q3 referenced weakening consumer confidence, while inventory challenges have also intensified as falling demand creates surplus stock issues.

The retail sector has also been grappling with long-term structural change. Most retailers issuing warnings in 2022 operate exclusively or mostly online and are feeling the impact of the post-pandemic shift back to store sales on top of increased delivery costs and product returns.

Silvia Rindone, EY UK&I retail lead, said: “The retail sector is facing a challenging winter, while, according to the EY ITEM Club Autumn Forecast, the UK economy is expected to be in recession until the middle of next year. However, there are steps businesses in the sector can take to prepare.

“For example, it is critical that retailers use the breathing space provided by the energy price cap to safeguard their long-term survival. This means reviewing their pricing strategy and considering how and where they can pass price rises on, developing robust cash management plans and inventory visibility to avoid costly write-offs.

“Above all, retailers need to adapt to changes in consumer behaviour. Our Future Consumer Index shows that the market is polarised between cash strapped consumers watching every penny and those willing and able to spend if retailers entice them.

“Navigating this K-shaped profile, focusing on core products, and understanding what will drive growth will be the key to thriving in the current economy.”

Travel & Leisure profit warnings double in 2022

Companies in the FTSE Travel and Leisure sector issued 22 profit warnings in the first three quarters of 2022, double the total issued for the same period in 2021. The sector had been the beneficiary of pent-up consumer spending post-pandemic but rising costs and pressure on disposable income and consumer confidence look set to intensify during a vital period for the sector.

Ms Robinson said: “Christmas will be a critical period for the travel and leisure sector, particularly hospitality. Winter is also when traditionally tour operators start to see deposits for summer travel coming in, but consumers are increasingly taking a wait and see approach, creating cash flow challenges and making it much harder for businesses to plan.

“Some companies will struggle to adapt, and some will be vulnerable to failure. But for travel and leisure companies who draw upon their experience, resilience, and agility, and tell a compelling long-term value story, the opportunities are significant.”