Profit warnings hit record levels across Yorkshire

Hunter Kelly,restructuringpartner at EY,Hunter Kelly,restructuringpartner at EY,
Hunter Kelly,restructuringpartner at EY, | other
Profit warnings issued by listed businesses across Yorkshire and the North East reached a record-breaking high in the first three months of 2020 - higher than any previous quarter in the last 20 years - according to EY’s latest Profit Warnings report.

Some 31 profit warnings were recorded by EY between January 1 and March 31 in the region, more than three times the number issued in the same quarter last year (10 were issued in the first quarter of 2019) and a 210 per cent increase year-on-year.

The significant increase in warnings was attributed to the Covid-19 crisis, which has temporarily paralysed many businesses, with hardly any sectors or businesses immune from its effects.

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In Yorkshire and the North East, profit warnings were spread across a wide range of sectors, with FTSE retailers bearing the brunt, accounting for nearly 30 per cent of all profit warnings in the first quarter this year.

Hunter Kelly, restructuring partner at EY, said: “The sectors and businesses issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns and their significant impact on sales levels, and in many cases, they were already showing signs of stress pre-Covid-19.

“Covid-19 has created new problems, but it has also accelerated existing structural change and exacerbated weaknesses. When lockdown lifts, it will create new stresses and strains on weakened balance sheets as working capital pressures increase and businesses will find it difficult to phase staff and production processes back in an efficient and economical manner.”

Over 300 profit warnings were issued by UK-listed businesses in the first quarter of 2020, almost equal to the entire number issued in the whole of 2019 (313) and 5 per cent higher than the total for 2018 (287). Compared with the same period last year, warnings rose from 89, representing a 238 per cent year-on-year increase.

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Although 77 per cent of profit warnings blamed Covid-19 in the first quarter of 2020, EY said significant parts of UK plc were struggling before the pandemic. In January 2020, EY said warnings rose 43 per cent year-on-year, when compared with the same month last year.

By percentage of companies warning, FTSE Travel & Leisure was the most dramatically affected, with 70 per cent of the sector issuing a profit warning, followed by Industrial Materials (63 per cent) and Retailers (61 per cent). All but five of the 42 FTSE sectors EY tracks issued Covid-19 related warnings in the first quarter of 2020.

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 per cent 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.

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Mr Kelly said: “We know from previous crises that one of the biggest tests comes when companies need to restock inventory, finance sales and restart supply chains that may have lost previous providers, be subject to capacity and logistical constraints and may require investment to be robust and reliable.

“This time, companies face a unique set of additional challenges as they will also need to consider the health of employees and customers as well as deal with an uncertain level of demand for their products and services.

"It is wise for companies to take a slow and steady approach to restarting operations that conserves headroom in their funding facilities and allows for flexibility, so they can react to continued uncertainty for some time to come.”