Saturday, September 26, 2020

Listed General Retailers issue more profit warnings than any other East Mids sector

Listed General Retailers have issued more profit warnings than any other sector in the East Midlands, according to a report released by EY today.

The analysis has found that the sector was responsible for 20% (64 out of 316) of all profit warnings issued by listed companies in the region over the last 20 years. When comparing these figures to the rest of the UK, FTSE General Retailers in the East Midlands issued more warnings than in any other region outside of London and the South East.

The sectors to issue the second and third highest number of profit warnings over the last two decades (1 January 1999 – 31 July 2019) were FTSE Support Services (40) and FTSE Construction & Materials (32).

EY has reported on listed company profit warnings since 1999, covering the impact of events such as the dot.com crash, 9/11 and the financial crisis.

Dan Hurd, EY’s Head of Restructuring for the Midlands, said: “When EY started tracking UK profit warnings in 1999, just 13% of households had internet access, the first smart phone was still a decade away and fax machines still had a prominent place in our offices.

“In the last two decades we’ve seen radical changes not only in technology, but also our economy and capital markets. In 2019 news travels fast, and capital also moves with increasing pace. Combined with a heightened level of uncertainty, this has significantly changed the speed of stakeholder response to profit warnings.

“General Retailers have felt the impact of these changes more than most. Technology has and will continue to disrupt the way in which we shop, forcing retailers to rethink their business models. It seems GeneralRetailers in the East Midlands have had a particularly hard time over the past two decades, which may in part be due to an inability to act quickly enough to these changing consumer habits.

“Once sales start to slip, companies quickly become starved of cash, leading to a downward spiral making it difficult to find the resources to invest in the changes needed. FTSE General Retailers must look to adapt for the future or face further financial difficulties.”

Black Thursday – most common day to issue a warning

Since 1999, EY has recorded over 6000 warnings by more than 2000 companies across the whole of the UK. During that time, January was found to be the month in which most companies are likely to warn, whilst Thursday is the most common day.

By sector, UK Support Services companies – including outsourcers – have issued the highest number of profit warnings in total (over 850 warnings), whilst UK General Retailers have seen the greatest proportion of its companies warn on average each quarter (9%).

Hurd explains: “Both sectors have significant exposure to fluctuations in business and consumer confidence. But both sectors are also structurally vulnerable to profit warnings. Outsourcers, due to their exposure to the contract cycle, and retailers, due to radical changes in consumer buying behaviour.”

EY research also found that by the morning of the third warning, a quarter of CEOs and a fifth of CFOs have left their companies. Within a month of their third warning, more than 10% of companies have also reported a covenant breach or reset – rising to 25% within a year.

Will we see a Brexit warning peak?

The biggest spikes in UK profit warnings in the last twenty years have followed significant global economic shocks. In 2001, a combination of the dot-com crash, 9/11 and a global recession, led to the highest number and percentage (22.7%) of UK quoted companies warning in the last 20 years. This is followed by another peak during the global financial crisis (2008), when EY recorded 449 profit warnings from 17.7% of UK quoted companies.

Hurd comments: “Our figures demonstrate that profit warnings can increase dramatically when companies don’t have time or agility to adjust to rapid changes in the economy.

“Companies have had some time to prepare for a variety of Brexit scenarios. However, a further economic shock could cause profit warnings to spike higher later this year, with warning levels already elevated by rising uncertainty.”

Prevent a profit warning chain reaction

One of the most striking parts of EY’s analysis is the speed within which companies are moving from their third profit warning to their first restructuring event – such as an administration, CVA or debt restructuring.

In most cases, the median gap between a company’s third profit warning and a restructuring event, has shrunk to just 91 days since 2016. This compares to 156 days pre-2016.

Hurd concludes: “Investors and stakeholders are clearly acting faster when companies issue a chain of profit warnings.

“If companies are forced to reforecast their earnings, it’s essential that they act boldly and quickly to grasp and deal with the fundamental issues behind their profit warning. Companies often underestimate their problem – or hope that something will change.

“As capital moves with increasing pace, it is more important than ever that we understand the triggers behind profit warnings and build resilience to help companies reshape their results and stop a profit warnings chain reaction.”

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