Profit warnings hit record levels across the North West

• Highest quarterly levels ever recorded in the region in over 20 years
• Warnings issued in the North West have seen a 238% increase year-on-year
• 77% of UK warnings in Q1 2020 cited COVID-19

Profit warnings issued by North West-listed businesses reached a record-breaking high in the first three months of 2020 – higher than any previous quarter since the report was launched 20 years ago – according to EY’s latest Profit Warnings report.

According to EY, 27 profit warnings were recorded between 1 January and 31 March 2020 in the region, more than three times the number issued in the same quarter last year (eight in Q1 2019) and a 238% increase year-on-year.

Unsurprisingly, a significant number of the warnings were attributed to the COVID-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects. In the North West, profit warnings were spread across a wide range of sectors, with Retailers, and Travel & Leisure hardest hit, accounting for nearly 30% of all North West profit warnings in the first quarter this year.

Sam Woodward, EY Restructuring Partner in the North West, commented: “The sectors issuing the highest number of profit warnings in the North West were those most exposed to the impact of the national lockdown. However, we were already seeing an increasing trend in the number of warnings, and in many cases, companies were already showing signs of stress.

“COVID-19 has undoubtedly created new problems, but it has also accelerated existing structural challenges and exacerbated existing weaknesses. When lockdown lifts, it will ease pressures for some, but a number of underlying issues will remain.”

A years’ worth of UK profit warnings issued in Q1 2020

301 profit warnings were issued by UK-listed businesses in Q1 2020, almost equal to the entire number issued in the whole of 2019 (313) and 5% higher than the total for 2018 (287). Compared to the same period last year (Q1 2019), warnings rose from 89, representing a 238% year-on-year increase.

Although 77% of profit warnings blamed COVID-19 in the first quarter of 2020, it is worth noting that significant parts of UK plc were struggling before the pandemic. In January 2020, EY recorded warnings had increased by 43% year-on-year, when compared to the same month last year.

By percentage of companies warning, Travel & Leisure was the most dramatically affected, with 70% of the sector issuing a profit warning, followed by Industrial Materials (63%) and Retailers (61%). All but five of the 42 FTSE sectors EY tracks issued COVID-19 related warnings in Q1 2020.

A difficult reboot

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% 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.

Woodward commented: “We know from previous crises that one of the biggest tests comes when companies need to reflate balance sheets, restock inventory and depend on supply chains that have been similarly tested.

“This time, companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers. It is wise for companies to take a slow and steady approach to restarting operations that allows for flexibility, so they can react to continued uncertainty for some time to come.”