North West profit warnings up 150% year-on-year in first half of 2020

• Warnings issued in the first half of 2020 hit a 20-year high in the region
• Forty profit warnings were issued in H1 2020, compared to 16 in the same period of 2019
• Effect of virus spreads through supply chains, shifting the epicentre of warnings
• Retail sector most affected in the North West.

The number of profit warnings issued by North West listed businesses in the first half of 2020 (H1 2020) increased by 150% year-on-year, with 83% citing the impact of the COVID-19 pandemic, according to EY’s latest Profit Warnings report.

EY recorded 40 profit warnings in the region in H1 2020 (Q1 & Q2) – higher than any previous H1 in the last twenty years – compared to sixteen in the same period last year (H1 2019). After a record breaking first quarter in 2020, when quoted companies in the North West issued 27 warnings, 13 were recorded in Q2 2020.

Profit warnings were spread across a wide range of sectors in the region in H1 2020, with businesses operating in the FTSE Retailers (7) and Travel & Leisure (4) sectors most affected.

Sam Woodward, EY Strategy and Transactions Partner in the North West, comments: “Unsurprisingly, the most immediate and dramatic impact of COVID-19 has been acutely felt by companies whose existing structural challenges have been exacerbated by the pandemic.

“However, many businesses that were essentially sound before the virus struck, have also been forced to fundamentally reassess their expectations and business plans too. It’s vital that North West businesses don’t underestimate the depth and extent of both the immediate and long-term challenges ahead.

“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 to come in government support and further twists and turns likely in Brexit negotiations. The UK economy is opening up, but it’s early days.”

The ripple effect

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 Strategy Partner at EY, UK & Ireland added: “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.

Sam 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 many North West and UK Plcs.”