South East: Profit warnings nearly double in 2020 reports EY

The South East recorded nearly double the number of profit warnings in 2020, when compared to 2019, according to data from the latest EY Profit Warnings Report.

In total 113 profit warnings were issued by the region’s listed businesses last year, compared to 59 in 2019.

In the region, listed businesses operating in the following FTSE sectors recorded the highest number of profit warnings during the year: travel and leisure (18); industrial support services (18); construction and materials (10); software and computer services (9) and household goods and home construction (7).

The majority of profit warnings from South East listed companies (86%) were attributed to Covid-19.

Richard Baker, managing partner at EY in the South East, said: “Listed businesses in the South East recorded the third-highest percentage year-on-year increase in profit warnings in 2020, behind only the North East and London. The experiences of listed businesses in the South East mirrors that of many other regions in the UK, where companies operating in consumer markets have faced continued Covid-19 related challenges. This, along with ongoing Brexit uncertainty, has made it more complicated to plan beyond the immediate short term. Businesses need to focus on remaining agile and on developing their transformation strategies – to exist beyond Covid and explore new opportunities in a rapidly changing economy.”

Profit Warnings Nationally

According to the report, 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 one calendar year – typically one in five of these companies enter administration within 12 months.

Sixty-two UK listed companies issued at least their third profit warning in 2020. This represents 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.

Baker commented: “Many UK businesses have been treading on thin ice for months with government support propping them up. While there is speculation these measures could be extended until the summer, the countdown has started, and in the coming weeks or months we’ll find out how many of these companies can keep their head above water.”

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.

Of the South East’s listed businesses who issued a profit warning in 2020, 10 issued three or more during the year

Baker added: “The record-breaking levels of UK 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 influx of these from spring onwards.

“For businesses that avoid administration, the mission ahead is immense, but not insurmountable. Balance sheets and capital are a top priority. While many businesses have sustained or built 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 rent and rates, as well as service much higher levels of debt. Meanwhile, supply chains continue to demand attention as we adjust to new trade agreements post-Brexit. Further reconfiguration is also needed as pressure intensifies for companies to adapt and remain relevant to customers, with a sharpened focus on their purpose and contribution to society.”

The sectors with the highest percentages of UK 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.”