Profit warnings: what they are and what to do if a company issues one 

Investing can be a rewarding venture, offering potentially better returns than a traditional savings account, but it is also riskier, especially if you don’t have a diversified portfolio. 

If you invest in a company and they issue a profit warning, investors' reactions can be alarming and make it tempting to act swiftly and sell. But is this the right way to react? 

What is a profit warning? 

A profit warning is when a listed company reports annual profits that are ‘materially below’ management or market expectations. 

This announcement usually includes information about why the company is facing materially lower profits than anticipated and will likely explore potential solutions in a future statement. 

It’s worth flagging that as a company’s share price is based on anticipated future profits set by analysts, if profits are expected to be materially lower, the share price may change.  

Profit warnings sound scary, but they’re more common than you think. 

According to EY Parthenon, in 2023, 294 profit warnings were issued by UK-listed companies, with 18.2% of firms issuing a warning, up from 17.7% during the 2008 financial crisis.  

What can trigger a profit warning? 

There are many reasons why a company may issue a profit warning, including: 

• The impact of higher interest rates 
• Higher costs for energy, staff and materials 
• Supply chain disruption 
• Delayed business spending 

One of the reasons why businesses may delay spending is due to the uncertain economic outlook and weaker consumer confidence. 

How much impact does a profit warning have on a company’s share price? 

A profit warning can spook investors.  

According to EY Parthenon, in the fourth quarter of 2023, companies experienced a median fall (on the day of warning) of 18.8%, the highest in over four years.

In some cases, profit warnings can have an even bigger impact. 

For example, shares in JD Sports recently plummeted over 20% after warning its profits would be lower than anticipated following worse-than-expected festive trading. 

Shares in Dr Martens recently crashed nearly 30% after a tough year of US trading and the chief executive announcing his resignation.  

Do profit warnings matter? 

Investors should always take note of a profit warning, especially if they are invested in the company issuing one. 

A profit warning could indicate issues with the company, the sector it operates in, or the UK economy, including consumer confidence. 

While some issues that cause a profit warning may be persistent, others may be short-term or out of a company’s control.  

Even the biggest names in the world can deliver a warning. 

Apple announced its first profit warning in 16 years in 2019 as the business struggled in China, while M&S warned on profits during the pandemic but recently posted stronger-than-expected Christmas sales. 

This shows a profit warning doesn’t necessarily mean a revival in a company’s fortunes is impossible.  

However, some companies, such as B&Q owner Kingfisher, have issued multiple profit warnings within a year, sparking concern for investors.   

What you should consider if a company issues a profit warning 

If a company issues a profit warning, the first thing you shouldn’t do is not panic.  

While some profit warnings can result in further disappointment, some can just be a bump in the road. 

Profit warnings could also be due to a difference between company guidance and investor expectations, with the former potentially overpromising without taking into account all of the headwinds.  

It’s difficult to determine exactly what to do when a company issues a profit warning, as each situation differs. 

First, it’s a good idea to examine why the profit warning was issued – is it due to short-term factors or issues? Or is the issue more prevalent in the sector or globally? 

Figuring out the problem and the company’s plan is vital, as this could be a buying opportunity if you’re confident in the long-term fundamentals. However, if this is due to more competition or weaker trading conditions, there may be future warnings. 

If you’re keen to minimise the risk of warnings, you could invest in profitable companies with a decent history of reliable profits and cash flow, known as ‘bond proxies.’ 

However, it’s worth noting these companies can have high valuations, meaning investing in a bond proxy can be expensive - and profit warnings can still occur.  

Also, the higher the valuation, the higher the profit expectations. If these aren’t met, the share price can crash. 

You can also be proactive and analyse any financial statements issued via Investegate.  

When a company releases a financial statement, some key areas to look at include: 

• Are like-for-like sales slowing?  
• Are costs rising?  
• Are debt levels increasing? 
• Are the cash reserves healthy? 
• Are stock levels declining? This can reveal weakening demand.  

Being an engaged investor can be a lot of hard work and research, but it doesn’t need to be. 

If you’re looking for help with investing, whether you’re just starting your journey or hoping to optimise your portfolio or strategy, a financial adviser can help. 

Unbiased can quickly connect you with a financial adviser regulated by the Financial Conduct Authority (FCA).