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Challenges on the horizon for retailers

Apr 28
Tags: Ernst & Young LLP
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Challenges on the horizon for retailers

UK retailers are likely to have some significant challenges to overcome in the near future, despite the "surprisingly good" end to 2016 that many businesses enjoyed.

That's according to the latest Profit Warnings report from EY, which revealed that FTSE general retailers issued only three profit warnings in the first quarter of 2017. That's significantly below the number traditionally recorded in the post-Christmas reporting period.

Six per cent of the sector issued warnings, beating the previous record low of seven per cent set in Q1 2010.

This year has also followed the trend of 2010 in that retailer profits have exceeded forecasts thanks to relatively low rates of interest, inflation and unemployment.

Jessica Clayton, head of retail transaction advisory services at EY, pointed out that these factors helped the sector to see a "surprisingly good" end to 2016. Expectations were lowered somewhat by the five-year high in profit warnings recorded last year and the impact of the Brexit vote.

Despite these positive developments, Ms Clayton underlined the importance of retail businesses taking a cautious approach to business in the coming years.

"Storm clouds are building and many UK retailers are increasingly feeling the squeeze from economic and structural challenges," she warned. "We're already seeing some early casualties. The further chipping away of margins from rising costs, when coupled with a drop in consumer spending growth, is likely to lead to further restructurings."

Looking at all sectors, the EY report revealed that UK quoted companies issued 75 profit warnings in the first three months of this year, two more than in the previous quarter and one fewer than in the same period of 2016.

This "seemingly stable" picture masks lower expectations and changes "beneath the surface" that are indicative of the shifting economic balance in the UK, the professional services firm said.

The sector issuing the highest number of profit warnings at the start of this year was support services, with 11, followed by travel and leisure (eight), non-life insurance (five), and software and computer services (five).

A positive trend has emerged in industrial and commodity sectors, where rising oil prices and general improvements in the global economy have contributed to a downturn in profit warnings since the end of 2015.

In the travel and leisure industry, however, there were eight profit warnings in the first quarter of the year, the joint highest quarterly total in the post-financial crisis era.

Looking at the near-term picture for all businesses, Alan Hudson, EY's head of restructuring for the UK and Ireland, noted that improving rates of global economic growth and rising exports, thanks to the weaker pound, should keep the number of profit warnings down.

"However, increased overheads, political and regulatory change, and digital disruption are piling pressure on sectors with long-standing structural issues, especially in consumer and business services," he added. "Periods of rapid change often leave companies behind and the next few years are unlikely to prove an exception."

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Image: iStock/JasonBatterham

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