The number of profit warnings issued by East Midlands listed businesses in the first half of 2020 (H1 2020) increased by 140%, with 79% citing the impact of the COVID-19 pandemic, according to EY’s latest Profit Warnings report.
EY recorded 24 profit warnings in the region in H1 2020 (Q1 & Q2) – its highest in 20-years. In the first quarter of 2020, quoted companies in the East Midlands issued 18 warnings, followed by six in Q2 – a 67% reduction.
Profit warnings were spread across a wide range of sectors in the region in H1 2020. However, FTSE Retailers in the East Midlands reported the highest number of profit warnings (13), accounting for 54% of all profit warnings in the region in the first half of the year.
Dan Hurd, Partner in the Strategy and Transactions team at EY in the Midlands, comments: “Unsurprisingly, the most immediate and significant impact of COVID-19 has been acutely felt by companies whose existing structural challenges have been exacerbated by the pandemic.
“Many businesses that were essentially sound before the virus struck, have been forced to reassess their expectations and business plans too. It’s vital that businesses in the East Midlands don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.
“With Retailers recording the highest number of profit warnings in the region this year, those businesses that have been able to make the most of their online operations and adapt quickly to continue to meet the needs of their customers, are likely to have fared best. Despite the high street beginning to open-up again, there’s a risk that we may not see a return to the same pre-COVID levels of consumer activity for quite some time.
“It is still a highly uncertain time for businesses, who are adjusting to new ways of working and changing levels of demand. With potential cliff-edges, in government support, and further twists and turns likely in Brexit negotiations, this uncertainty may continue in the coming months.”
Across the UK, almost a third (33%) of listed companies – compared to 18% in 2019 – issued a profit warning in the first half of 2020. EY recorded 466 profit warnings in H1 2020 – more than the total number issued last year (313).
In Q2 2020, the impact of COVID-19 rippled across the UK economy and along supply chains, shifting the epicentre of profit warnings. The immediate impact of the virus was felt in Q1 by sectors most impacted by lockdown – travel, leisure, hospitality, and retail – but this has since spread to industries most exposed to the knock-on effects of changing corporate and consumer behaviour.
Lisa Ashe, Turnaround and Restructuring Partner at EY, UK & Ireland: “We expect supply chain vulnerability to be one of the biggest areas of risk for companies in the next six months. Supply chain resilience will no doubt feature highly on corporate agendas, not least because of the additional challenges associated with Brexit. There are already large-scale restructurings in the UK market that could have considerable impact along supply and value chains.”
Profit warnings from consumer-facing companies were less prominent in Q2 2020, however this is only after an exceptionally high level of warnings and forecast adjustments in March. The FTSE Retailers and FTSE Travel & Leisure sector still has the highest number of companies warning three or more times in a 12-month period, which EY found gave a company a one in five chance of a distress event – such as an administration, CVA, debt restructuring or distressed sale – occurring in the year ahead.
Dan concluded: “Boards need to guard against complacency and be ready to take swift and decisive action to reshape their business to face a different future than they imagined just a few months ago. Companies could find that previously healthy parts of their business are no longer profitable. This is a pivotal moment for UK plc.”
