South West and Wales listed businesses record a 48% increase in Profit Warnings in 2020 – EY

Lucy Winterborne, EY’s Head of Restructuring in the South West. Picture by Andrew Higgins/Thousand Word Media

Listed businesses in the South West and Wales recorded a 48% increase in profit warnings in 2020, when compared to 2019, according the latest EY Profit Warnings Report.

In total, 46 profit warnings were issued by listed businesses in the South West and Wales in 2020, compared to 31 in the previous year. Of these profit warnings 38 were issued by listed businesses in the South West, compared to 8 in Wales.

In the South West and Wales combined, listed businesses operating in the following FTSE sectors recorded the highest number of profit warnings during the year: Travel and Leisure (7), Industrial Support Services (5), Household Goods and Home Construction (5) and Finance and Credit Services (4).

Of the South West and Wales’ regional industries, those classified as operating in Consumer Discretionary industries, including Retailers and Travel and Leisure sectors – recorded the highest level of profit warnings (18 in total). 14 of these were businesses located in the South West, compared to four in Wales. This was followed by listed businesses operating in Industrials (11) and Financial Services (4).

The majority of profit warnings from South West and Wales listed companies (78%) were attributed to COVID-19. A greater number of Welsh listed businesses cited COVID (88%), compared to those operating in the South West (76%).

Lucy Winterborne, EY-Parthenon Partner in UK&I Turnaround and Restructuring Strategy in the South West and Wales, said: “The experiences of listed businesses in the South West and Wales mirrors that of many other regions in the UK, where those dealing in non-essential consumer markets have faced frequent and continued challenges on account of difficult economic conditions. This has resulted in a greater number of listed businesses operating in these sectors issuing profit warnings during 2020.

“Businesses have found it increasingly difficult to plan for the future, due to rapidly changing economic conditions. Whilst it’s unlikely there will be any immediate respite from these challenges, there is now greater focus amongst senior leadership on developing their transformation strategies to explore opportunities in new markets.”

Profit Warnings Nationally

According to the report, the number of UK listed companies at risk of insolvency has doubled in the last 12 months, according to data from the latest EY Profit Warnings Report.

In 2020, there was 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.

Lucy comments: “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 West and Wales listed businesses that issued a profit warning in 2020, four issued their third or more within a 12-month period.

Lucy added: “The record-breaking levels of profit warnings, particularly in the first half of the year, are at odds with the significantly low number of corporate insolvencies. Insolvencies in the UK haven’t been avoided, they’ve been deferred and we expect to see an influx of these from spring onwards.

“For businesses that avoided Administration, the mission ahead is immense, but not insurmountable. Government and bank support has meant that businesses have had cash, in some cases hiding underlying failures in the business. However, once this funding is used up, businesses will face 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.”