Exchange rate fears help push profit warnings to six-year high

THE number of companies warning of lower than expected profits hit a six-year high last year despite signs of a stronger economic recovery.

Companies issued 299 profit warnings in 2014, up from 255 in 2013 and marking the highest level since 2008, according to accountancy group EY.

Its regular update on profit warnings appears to fly in the face of the better economic news over the past few months, but analysts at EY said the rise reflected greater uncertainty, particularly over ‘politics, policy and pricing’.

Shifting exchange rates caught many companies out, with 17 per cent of those that issued a warning blaming the stronger pound and weaker currencies abroad for their announcement.

The grocery sector saw its highest ever level of warnings, including the high-profile crisis at Tesco. EY partner Jessica Clayton said the sector was undergoing a ‘revolution’, with ‘disruptive new entrants, online adoption and changing consumer behaviour exposing weakness and overcapacity’.

The slump in the oil price also took its toll, with a quarter of all companies providing services to the industry warning of lower than expected earnings.

Alan Hudson, EY’s partner for restructuring, said there was a difficult period of adjustment for oil groups as crude had fallen below $50 a barrel. However, he said the industry would emerge ‘leaner and fitter’.

The biggest cause cited for a profit warning – accounting for 20 per cent of announcements – was delayed or cancelled contracts as companies put spending on hold.

Hudson also warned that while the economy was improving, companies would still face difficulties in 2015: ‘Many of these pressures represent new realities, rather than a passing phase. An improving economic outlook is no longer a guarantee of a smoother ride for UK plc’.

Official economic figures this week are expected to show the UK economy grew by 2.8 per cent in 2014, its fastest rate of growth since 2007.