Profit warnings issued by UK-listed businesses reached a record-breaking high in the first three months of 2020 – higher than any previous quarter in the last twenty years with a significant increase in insolvencies predicted when the lockdown end according to EY’s latest Profit Warnings report.
301 profit warnings were recorded by EY between 1 January and 31 March 2020, almost equal to the entire number issued in the whole of 2019 (313) and 5% higher than the total for 2018 (287). Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238% year-on-year increase.
Over a fifth of the UK’s quoted companies issued a profit warning in Q1 2020, more than the percentage of companies warning in the whole of 2008 (17%). Unsurprisingly this hike was attributed to the COVID-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects.
Although 77% of profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic. In January 2020, EY recorded warnings had increased by 43% year-on-year, when compared to the same month last year.
Alan Hudson, UK Head of Restructuring at EY said: “Political uncertainties and rapid structural change pushed UK profit warnings to a ten-year high in 2019. COVID-19 has created new problems, but it has also accelerated existing structural change and exacerbated existing weaknesses.”
“When lockdown lifts, it will undoubtedly ease some pressures, but these underlying issues will remain – alongside new challenges.”
In Q1 2020, the sectors issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns, and in many cases were already showing signs of stress before the COVID-19 crisis.
By percentage of companies warning, FTSE Travel & Leisure was the most dramatically affected, with 70% of the sector issuing a profit warning, followed by Industrial Materials (63%) and Retailers (61%). All but five of the 42 FTSE sectors EY tracks issued COVID-19 related warnings in Q1 2020.
Lisa Ashe, UK Restructuring Partner at EY said “Consumer discretionary sectors have been hit exceptionally hard, due to the nature of their operations, plunging consumer confidence and existing structural weaknesses. Airline travel and holidays have all but stopped. Many retailers have redesigned online operations to protect staff, but this isn’t always a viable option.”
“Some companies have also found themselves on the wrong side of a trend. Supermarket sales have increased hugely, but food producers supplying to restaurants and pubs, for example, have seen sales plummet.”
COVID-19 is expected to deliver the biggest blow to UK GDP since the First World War. The economic forecasting group, EY ITEM Club, estimates that UK GDP will fall by 6.8% in 2020, if the UK lockdown begins to lift at the end of May, and the UK experiences a slow ‘U’ shaped recovery without any major relapses.
EY expects the number of profit warnings to fall, but distress levels to rise – with echoes of 2008 to 2009 and the aftermath of the financial crisis. Notably, there were more insolvencies in 2009 than 2008. The report anticipates a significant increase in corporate insolvencies when the lockdown lifts.
Hudson continued “We know from previous crises that one of the biggest tests comes when companies need to reflate balance sheets, restock inventory and depend on supply chains that have been similarly tested.”
This time, companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers. It is wise for companies to take a slow and steady approach to restarting operations that allows for flexibility, so they can react to continued uncertainty for some time to come.