Virus triggers profit warning spike

Listed companies in the Midlands are issuing profit warnings at an unprecedented rate, with the sharp uptick triggered by COVID-19, according to the latest analysis from EY.

Thirty-four profit warnings have been recorded by EY in the region since the start of January this year, more than triple the number (11) issued in the first three full months of 2019 (Q1 2019). Twenty-two of the warnings issued so far in 2020 specifically blamed the impact of COVID-19 for a material downgrade to their profit expectations according to EY, which has been tracking UK profit warnings for over twenty years.

When analysing all UK profit warnings made in 2020, compared to Q1 2019, EY found the Midlands has experienced the greatest year-on-year increase (+209%), followed by the South East (+188%), the North West (+150%) and Yorkshire & the North East (+100%).

EY restructuring partner Dan Hurd said: “COVID-19 has profoundly affected businesses’ ability to plan and forecast and is unsurprisingly driving a significant rise in profit warnings.

“In the Midlands, the impact on retailers based in the region is contributing to a spike in warnings. The sector has been heavily impacted by a fall in consumer demand and the closure of physical stores - with the exception of those providing essential supplies such as groceries and pharmaceuticals.

“With a partial lockdown set by the Government last week and with an increasing number being forced to temporarily cease manufacturing and operations, we are likely to see an increasing impact on other sectors particularly ones that require ‘employee proximity’.”

UK quoted companies have issued 167 COVID-19 related profit warnings equivalent to around 13% of the whole of the Main Market and AIM.

Almost 25% (38) of the total number of COVID-19 related profit warnings issued in the UK in 2020 were from companies in the FTSE Travel & Leisure sector. Others hit hardest include sectors affected by social distancing measures, such as retailers, housebuilders and media companies – especially those impacted by event cancellations and falls in advertising spending.

EY also reported a further spike in warnings from FTSE Retailers and FTSE Household Goods and Home Construction - especially in sub-sectors that cannot easily (or at all) mitigate with online sales, such as housebuilders and motor dealerships.

Simon O’Neill, EY’s managing partner in the Midlands, said: “Many regional economies are dominated by particular sectors and we know that when economic activity is concentrated in such a way the impact locally can be all too real.

"Beyond the implementation of immediate stabilisation measures, which will be of course the prime focus, it will be important to turn to the geographic impact of COVID-19 and to identify what additional schemes are required to protect and then restore local economies.”

Pictured: Simon O'Neill - EY's managing  partner in the Midlands