To say 2022 has been a difficult year for UK listed businesses would be something of an understatement.
The outlook was generally upbeat at the start of the year, with most believing the pandemic was a thing of the past and some stability would return.
However, the war in Ukraine and the implications this has had on global markets means the mood has switched markedly.
Inflation leading to warnings
In the last quarter, 72 companies listed on the London Stock Exchange issued profit warnings, according to research by EY.
Compared to the first quarter of 2020, that number is quite small, where 301 companies issued profit warnings, the largest for a single quarter.
As well as that, Q1's figure is roughly in line with the 10-year average for first-quarter warnings of 73 (if 2020 is excluded).
However, where there may be some more concern is the reason behind the downgrades.
A record 43% of companies cited rising costs as the main reason for raising the alarm, up from 27% in the last quarter, and considerably higher than the 10% average for the last decade.
Retailers hit hardest
Taking a closer look, the listed retailers top the chart for issuing the most profit warnings with nine, according to the research, and it looks like the sector will continue to bear the brunt of macro conditions.
Sainsbury, Unilever and Associated British Foods are high profile examples of businesses that have been hit by a margin squeeze caused by ballooning costs.
Rising inflation isn’t the sector’s only problem, however, as it continues to battle with supply chain issues that have dogged many since the onset of the pandemic, with 67% citing it as a reason for their profit warnings.
Naturally, costs at some point would have to be passed on to the consumer in the form of price hikes, with AB Foods saying it is doing exactly that at its discount clothing arm, Primark.
As a result, the firm warned that inflationary pressures will lead to a greater reduction in profit margins than originally expected.
They were by no means the only listed retailer to urge caution.
Sainsbury’s, the UK’s second-largest grocery retailer, said it expects profits to be down by at least £40mln compared to the year prior, citing the cost-of-living crisis putting a squeeze on household spending.
The retail sector’s problems so far “have largely been on the supply, rather than demand, side”, says Silvia Rindone, retail lead at EY, but demand-side headwinds are likely to rise.
“Companies will now be facing a combination of supply chain, cost, and demand headwinds, as the rise in the cost-of-living affects real incomes and creates a challenge for the sales growth that has helped drive the recovery so far,” she said.
“Consumer sector profit warnings look set to remain high as the ability to pass costs on depends on the capacity of increasingly pressured consumers to absorb them.”
What can retailers do?
Of course, retailers are not sitting back and taking it all on the chin.
There's an even sharper focus on value for money among the food retailers.
Asda, Tesco, Sainsbury’s and Marks and Spencer are just a few to bolster their 'value' ranges to keep customers from seeking out the discount kings Aldi and Lidl.
Rindone also expects “significant trading down,” as consumers look for any ways to save on spending where possible.
That possibly spells bad news for some of the more ‘upmarket’ retailers like M&S and Sainsbury’s, whose customers may themselves feel the squeeze and seek cheaper alternatives.
With that being said, analysts at Deutsche Bank have argued that lower-income households will be hit disproportionately by soaring inflation.
Retail faces a tough task of getting the balance right between hiking prices and keeping customers, all while still having to deal with possibly supply chain disruptions in some cases.