- In 2020, 62 UK listed companies issued their third consecutive profit warning
- A record 35% of UK quoted companies issued profit warnings last year, with a total of 583 warnings
- Fourth quarter profit warnings fell to a decade low in 2020, camouflaging hidden stresses
- 72% of FTSE Retailers issued profit warnings in 2020
Sunday 31 January 2021: 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 a 12-month period – typically up to one in five of these companies enter Administration within 12 months of the third warning.
Sixty-two UK listed companies issued at least their third profit warning in 2020. These companies represent 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.
Alan Hudson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, said: “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 weeks or months we’ll find out how many 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.
Mr Hudson added: “The record-breaking levels of profit warnings, particularly from the first half of the year, are at odds with the significantly low number of corporate insolvencies. Insolvencies in the UK haven’t been dodged, they’ve been deferred and we’re likely to see an influx of these from spring onwards.
“For businesses that avoid Administration, the mission ahead is immense, but not insurmountable. Balance sheets and capital are a top priority. While many businesses have sustained or built cash reserves, they have done so by deferring significant outgoings and accessing government and bank support. When this support falls away, cash reserves may deplete rapidly to fund working capital, the return of staff, pay rent and rates, as well as service 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.”
Of the total 583 profit warnings issued by UK listed companies in 2020, 86% (499) were attributed to COVID-19. The sectors with the highest percentages of 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.”
In a recent EY survey of 300 UK retail leaders, the rapid and permanent shift to online was the outright, key challenge facing the sector in 2021, accounting for 45% of responses. The top priority for 2021, as identified by 30% of the responses, was the channel shift to (and cost efficiency of) online. In terms of sentiment, 51% of respondents assessed their confidence in the retail sector for the year ahead as ‘cautious, but willing to invest in the right projects and businesses’.
Dr Bitar added: “UK retail must adapt further if it is to ensure long-term success. Developing a deeper understanding of evolving consumer needs and the agility to respond to them is more important than ever before. It will be pivotal to take bold, strategic decisions, such as transformation projects, simplifying unnecessary complexity within the business, and making appropriate investments. Consumers are also demanding more from brands on both purpose and sustainability – these are no longer optional extras but should be considered intrinsic to retail.”
