- 38 retail profit warnings issued in Q1 2020, compared to 32 in the whole of 2019
- Three quarters (28) of retail warnings in Q1 2020 cited COVID-19
LONDON, MONDAY 18 MAY, 2020: FTSE Retailers issued 38 profit warnings in the first three months of 2020 (Q1 2020), exceeding the total number recorded in the sector in the whole of 2019 (32), according to EY’s latest Profit Warnings Report.
Unsurprisingly, three quarters (28) of the warnings issued by listed retailers in Q1 2020 cited COVID-19, with many businesses experiencing an abrupt slowdown as a result of the crisis. When compared to the same period last year (Q1 2019), the number of warnings issued by the FTSE retail sector in Q1 2020 more than tripled from 11. However, the sector was already demonstrating signs of stress. By the end of February of this year – pre-lockdown – 10 FTSE Retailers had already announced a material downgrade to their profit expectations.
Julie Carlyle, EY’s Head of Retail, UK & Ireland, comments: “A number of retailers entered 2020 already grappling with significant long-term structural pressures, which have been exacerbated by the impact of COVID-19 and lockdown measures. With increased financial pressures and further shifts in consumer behaviour, we expect those structural challenges to accelerate.
“Many savvy retailers have responded to the crisis by quickly modifying their online operations. Others have used the opportunity to rethink their store portfolios or business model. Those that give their customers confidence and engender trust with positive behaviour, including supporting the community, will likely see the benefit of that from consumer goodwill in the longer term.”
According to EY’s report, ‘Specialty Retailers’ issued the most profit warnings (13) in the FTSE Retailers sector in Q1 2020, followed by ‘Apparel Retailers’ and ‘Home Improvement’ Retailers (both issuing 10). ‘Diversified Retailers’ issued the least number of warnings (5).
Record breaking UK warnings
In Q1 2020, a total of 301 profit warnings were recorded by EY; 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, warnings in 2020 have significantly risen (from 89 in Q1 2019), representing a 238% year-on-year increase.
Although 77% of UK 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 UK warnings had increased by 43% year-on-year.
Lisa Ashe, UK Restructuring Partner at EY comments: “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.
A difficult reboot
Looking ahead, EY expects the number of UK 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.
Carlyle added: “As retailers continue to navigate the changing situation and begin to enter the recovery stage, it will become increasingly important to understand the demographics they sell to, as well as how customer behaviour continues to shift.”