The number of profit warnings issued by Yorkshire-based listed businesses in the first half of 2020 (H1 2020) increased by 94% year-on-year, with 79% citing the impact of the COVID-19 pandemic, according to EY’s latest Profit Warnings report.
EY recorded 33 profit warnings in the region in H1 2020 (Q1 & Q2) – higher than any previous H1 in the last 20 years - compared to 17 in the same period last year (H1 2019). After a record breaking first quarter in 2020, when quoted companies in Yorkshire issued 24 warnings, nine 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 (8) and Construction and Materials (5) sectors most affected.
Hunter Kelly, Turnaround and Restructuring Strategy Partner at EY in Yorkshire commented: “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 been forced to fundamentally reassess their expectations and business plans too. It’s vital that businesses across Yorkshire 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 reacting to new ways of working with changing and unpredictable levels of demand, including the risk of cliff-edges to come in government support. This is before considering the twists and turns likely to come from the Brexit negotiations. The UK economy is opening up from COVID-19, but it is very early days and it is going to be a long while before most businesses will be able to say they are getting close to normal.”
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 number issued for the whole of 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 exposed to the knock-on effects of changing corporate and consumer behaviour.
Suzanne Robinson, Managing Partner for Yorkshire and Humberside added: “We expect supply chain vulnerability to be one of the biggest areas of risk in the next six months. Supply chain reliability should 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, following the 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 research found, gives a company a one in five chance of encountering a distress event – such as an administration, CVA, debt restructuring or distressed sale - in the year ahead.
Hunter concluded: “Boards should guard against complacency and expecting a gradual and smooth trajectory back to normal. They need to 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 Yorkshire and UK Plc to take decisions with long term impacts.”