The number of profit warnings issued by North East-based listed companies increased significantly to 16 in 2020, compared with just two in 2019, according to EY’s latest Profit Warnings report.
The figure is an eight-fold increase on 2019 and at a similar level to the peak of the financial crisis in 2008, when 17 warnings were recorded in the region.
In the North East, warnings were weighted to the first quarter of the year, when seven were issued and the pandemic first began to impact on the economy.
Unlike other regions, which saw companies in the FTSE Retailers; and Travel and Leisure sectors hit the hardest, profit warnings issued by North East companies were well spread across a broad range of sectors throughout the year.
Hunter Kelly, EY-Parthenon Turnaround and Restructuring Strategy Partner, said: “The majority of North East businesses issuing profit warnings last year did so in the first quarter and 94% of all profit warnings issued during the year cited COVID-19 as a factor, many in the wake of the initial shock of the first lockdown in March.
“Since then, businesses have continued to be impacted by the pandemic, but profit warning levels fell as the year progressed. This reflects management teams being cautious with their forecasting, as well as the help available from the various government support initiatives being extended.
“Many businesses have been reliant upon government for a number of months now. While there is speculation these measures could be extended until the summer, the countdown has started, and in weeks or months we’ll find out how many companies have the headroom and business model to stay afloat.”
The number of UK listed companies at risk of insolvency has doubled
The number of UK listed companies at risk of insolvency has doubled in the last 12 months.
In 2020, there was a surge in the number of UK listed companies issuing three or more profit warnings in a 12-month period – typically up to one in five of these companies enter administration within 12 months of the third warning.
Sixty-two UK listed companies issued at least their third profit warning in 2020. These companies represent 5% of all UK listed companies, and 10% of the FTSE 350. The 2020 total (62) is almost double that of 2019 when there were 32 and is more than double the 31 recorded in 2018.
A total of 583 profit warnings were issued by UK listed companies in 2020, this is the highest annual total in 21 years of EY research – 15% higher than the previous record of 506 in 2001. This historic high contrasts with very low levels of corporate insolvency.
Kelly added: “The record-breaking levels of profit warnings, particularly from the first half of the year, are at odds with the significantly low number of corporate insolvencies. Insolvencies in the UK haven’t been dodged, they’ve been deferred and we’re likely to see an increase of these from spring onwards.
“For businesses that avoid administration, the task ahead is difficult, but not insurmountable with a proactive approach and the right strategy. Balance sheets and capital are a top priority. While many businesses have reasonable cash reserves, they have done so by deferring significant outgoings and accessing government and bank support. When this support falls away, cash reserves may deplete rapidly to fund working capital, the return of staff, pay deferred liabilities including VAT, as well as service much higher levels of debt. Meanwhile, supply chains continue to demand attention as we adjust to new trade arrangements post-Brexit. Further reconfiguration is also needed as pressure intensifies for companies to adapt their service levels and products to remain relevant to customers, with additional expectations on purpose and contribution to society.”
Of the total 583 profit warnings issued by UK listed companies in 2020, 86% (499) were attributed to COVID-19. The sectors with the highest percentages of companies issuing profit warnings last year, were those most affected by the implications of lockdown restrictions on consumer behaviour – for example retail, travel and leisure. In 2020, 19% of FTSE Retailers issued their third or more profit warning, while the equivalent figure for FTSE Travel and Leisure was 16%.
Reshaping retail
Retail has been one of the hardest hit sectors of the pandemic, having reported the worst sales figures on record. The final quarter of 2020 concluded with FTSE Retailers surpassing the highest annual total of profit warnings for the sector by reaching 53 – two more than the previous high set in 2008.
Lockdown restrictions have significantly impacted traditional bricks-and-mortar retailers. Those with a good mix of digital, across multiple channels, and the capability to adapt quickly to customer demands have performed better. For example, the shift away from formal and work wear to ‘athleisure’ has been a pocket of success within fashion.
Dr Mona Bitar, EY-Parthenon Partner and UK&I Consumer Product Leader, said: “Brand survival for retailers in 2020 relied on smart, new strategies around what and how to sell consumer products. Understanding the consumer has never been so important and the increased penetration of the online channel, which is likely to stay beyond the pandemic, has forced retailers to accelerate improvements in their end-to-end supply chains. As well as the challenges retailers are facing, new opportunities are opening-up as a result of the rapid scaling-up of online operations, the expansion of fulfilment capacity and establishing a presence in new markets.”