The global economy is struggling, according to advertising and marketing giant WPP Group PLC (LON:WPP).
The FTSE 100-listed group is generally seen as a bellwether for the world’s financial health, given that companies tend to spend more on advertising when times are good but cut back when things get more difficult.
Like-for-like sales and revenues fall
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After record results in 2016, WPP has conceded that the start to 2017 has been “much tougher”, with its clients’ spending coming under “considerable pressure” as they look to cut back on costs.
As a result, like-for-like revenues – which exclude the impact of currency and acquisitions – fell 0.3% in the six months ended 30 June, while like-for-like net sales were also 0.5% lower compared to the same period of 2016.
The weak pound and a handful of acquisitions gave the reported revenue column a lift though; up 13.3% to £7.4bn, or 1.9% on a constant currency basis.
Headline underlying profits (before interest and tax) also edged 1.9% higher on a constant currency to £882mln, thanks to a slight improvement in profitability, with like-for-like margins up 0.1 percentage points to 13.9%.
A 16.1% dividend hike to 22.7p will provide investors with some consolation though.
Cost-focused clients cutting back on ad spend
But the underlying theme was that many of its clients are committing less and less money to their marketing budgets amid a tepid global economy.
WPP also blamed “fierce” competition in the industry for the weak first half, noting that some of its competitors have been offering up-front discounts to customers in a bid to win new contracts.
The group couldn’t even shift some of the responsibility on to the cyber-attack which hit some of its operations in June.
It said most of the disruption had been fixed within a week and that it “did not experience any significant loss in revenue from clients or of data”.
READ: WPP still experiencing disruptions after cyber attack
‘Much tougher’ start to 2017
“After another record year in 2016, the group's performance in the first seven months of the new financial year has been much tougher, as worldwide GDP growth, both nominal and real, seems to have slowed in the second half of last year and into the New Year,” read this morning’s statement.
“In the last year or so, growth has become even more difficult to find, perhaps due to increasing social, political and economic volatility.”
“In a slower growth world, inflation has been negligible, perhaps also suppressed by digital deflation. As a result, clients have markedly less pricing power and finance and procurement departments are very focused on cost.”
Lowers full-year guidance
Unfortunately for WPP, the environment hasn’t improved as it moves into the second half either, with like-for-like revenues and net sales slipping 4.1% and 2.6% respectively in July.
As a result, the London-headquartered company has lowered its full-year growth forecasts as the major slowdowns in some of its key industries, such as consumer goods and retail, look set to continue.
WPP now expects like-for-like revenue and net sales growth of between zero and 1% which, given the performance in July, looks optimistic.
City broker still broadly positive
READ: Deutsche Bank switches ad agencies preference from WPP Group to French rival Publicis
“We are positive on many of WPP’s underlying attractions including: the strength and quality of its operations and brands, its extensive international footprint, record of innovation and new business wins, its cost focus, and its overweight exposure versus its peers to digital and less well-developed regions,” said Shore Capital analyst Roddy Davidson.
“However deteriorating trading conditions are a concern and on a first past basis we are minded to trim our full year pre-tax profit forecasts by 4-5% to reflect the weaker outlook highlighted above.
“That said the group’s current valuation already reflects a weakening outlook following a period of share price weakness (down 6% over the past three months).”
‘Tough for all media players’
“Life is getting tougher in the media world, with WPP experiencing a slowdown in trading in June and July, spread across much of the world and in many different media sectors,” said Hargreaves Lansdown fund manager Steve Clayton.
“It is hard going for all players in media-land at the moment; clients are keeping a tight lid on spending and procurement departments are ruthless in the way they push agencies to lower prices.”
The company saw more than £200mln wiped from its value on Wednesday morning, with WPP the heaviest blue chip faller, down 10.7%% to £14.20.
--Updates for comment and share price--