The UK’s top retailers continue to face downward pressure with consumers keeping their purses tightly shut as retail companies issue more profit warnings, research shows.

UK-listed companies in the FTSE Retailers sector issued seven profit warnings in the first three months of 2024, two more than the same period in 2023, according to EY Parthenon’s latest Profit Warnings report.

The cost-of-living crisis continues to put strain on disposable incomes, with the result that 41% of FTSE retailers issued a profit warning over the past 12 months. This pressure continues to affect the wider FTSE Consumer Discretionary group of companies, which issued the highest number of profit warnings (24) in the first quarter of this year, accounting for 34% of all warnings during the period.

The FTSE Personal Goods sector, where more than 50% of firms warned on profits in the first quarter of 2024 alone, has seen the biggest growth in warnings. Companies within the sector issued five during the first quarter of the year – the highest number since the pandemic.

In the past 12 months, two-thirds of the sector have issued a profit warning, compared with one-third at the end of 2023, making it the sector with the highest percentage of companies warning and also the fastest increase in the past three months.

This increase reflects the spread of earnings pressures into the luxury goods sector and ongoing pressure on semi-durable goods, such as clothing, footwear and jewellery.

Summer boost?

Despite the rise in profit warnings in this sector, experts suggest the outlook for 2024 is looking more positive for retailers, with the EY ITEM Club forecasting consumer spending to rise by 0.7% this year.

Silvia Rindone, EY UK&I Retail Lead, says: “Retailers will be hoping that consumer confidence is buoyed as we enter the summer months, offsetting new cost pressures arising from increases in business rates and the National Living Wage.

But Rindone warns that retailers will have to deploy their adaptability again, “ensuring they too are transitioning to growth. While the economic outlook may be more positive, this does not mean retailers should become complacent”.

Simon Gray, Head of Business, ICAEW, says: “Despite a more positive outlook as highlighted by ICAEW’s Q1 2024 Business Confidence Monitor (BCM), businesses continue to face ongoing challenges. ICAEW’s Retail Community Advisory Group met recently and highlighted cost pressures from the rise in the National Living Wage, alongside uncertainty with demand linked to the weather.”

Agility to secure success

Retailers should continue to monitor any changes in buying behaviour as over recent years shoppers have become much savvier in looking for bargains, EY says.

Contract cancellations and delays were cited as the main reason for warnings by 29% of companies, while higher costs and weaker consumer confidence each accounted for 17% of warnings in Q1 2024.

Across all sectors, the number of profit warnings issued by UK listed companies fell 7% year-on-year to 70 in Q1 2024 and dropped slightly from Q4 2023, when 77 warnings were issued.

Despite the quarterly fall, the number of companies warning for the first time in 12 months reached its highest level since the start of 2022, with 61% of companies in the first months of 2024 issuing a ‘new’ warning.

Meg Wilson, EY Partner, Turnaround and Restructuring Strategy, says: “Sector stress and insolvency is rising, especially in mid-market retail.”

That said, there is a growing group of retailers that are meeting – and even beating forecasts, Wilson says.

“Low demand creates intense competition for a limited share of wallet, amplifying the advantage for retailers that have moved quickly and decisively to reshape their business,” Wilson says.

ICAEW’s Gray says: “With cost-of-living pressures continuing to bite and ahead of any interest rate cut, consumers remain cautious. Indeed, the BCM cited customer demand and market competition as top growing challenges facing businesses.”