Record profit warnings – but what next?

This week’s Capital Agenda Blog comes from Alan Hudson, Head of UK&I Restructuring and Kirsten Tompkins, profit warning report author and UK&I Transaction Advisory Services Content Editor.

UK quoted companies issued a record 301 profit warnings in the first quarter of 2020 – a total we’d usually expect over the course of a year, not three months. Over three-quarters of these warnings cited the impact of COVID-19, which has been a factor in every UK profit warning since mid-March.

In this blog, we’ll explore what our profit warning data is telling us about the challenges facing UK companies and how society and the economy could reshape in the wake of the virus.

In other words, what happens next?

Breaking all records

Unprecedented upheaval has triggered an unprecedented number of profit warnings. In the first quarter alone, 21% of UK quoted companies issued a warning, including 84 companies that hadn’t warned in the last decade. Since the start of 2020, we’ve recorded profit warnings from 39 of the 42 FTSE sectors we track. Clearly, some sectors have felt a far greater impact than others, but the effect on the economy is broad – and broadening – with normally resilient companies feeling the pain.

The chart below shows the progression of COVID-19 profit warnings across UK companies, from the initial impact on Asian supply and demand to the economic shock of lockdown and the repercussions that followed, up and down supply and value chains. The national lock down hit the consumer discretionary side of the economy hard and fast in mid-March. But the impact of the lockdown wasn’t limited to the consumer side. Many factories were forced to at least temporarily close, with knock-on effects that are apparent in the exceptionally high level of FTSE Industrial Materials warnings in Q1.

Timeseries C19

In the last few weeks, it’s this transmission theme that’s dominated profit warnings. Companies are feeling the impact of supply chain disruption, corporate cash conservation – including delayed rent payments and falling spending in advertising and recruitment – and the consequences of a dramatic fall in global economic activity, which has triggered falls in trade, transportation and the oil price.

Falls in oil industry capex have significant ramifications for many industrial sectors, as we saw in 2014-16. Broad based falls in economic activity are already generating increased profit warnings in financial sectors.

% of sector warning

There is obvious danger in the depth of COVID-19’s impact on sectors like retail and travel. But there’s also danger in the breadth of impact that our data highlights. One of the big lessons we learnt from 2008, is that the economy has interconnections that we don’t always understand until a vital link is severed.

A difficult transition

So, what does this mean for the next stage and the move from lockdown to recovery?

We know from previous, less intense, crises that one of the biggest tests comes when weakened companies and stressed management teams need to reflate balance sheets, restock inventory, restart operations, and depend on supply chains that have been similarly tested. There were more insolvencies in 2009 than 2008, with numbers barely falling until the middle of the decade.


Government support has been extensive and focused on trying to limit the structural damage. But there is a limit to its capacity and duration. The restart-challenge is also considerably larger than after previous recessions due to the depth and breadth of the impact we discussed above. A quarter of UK businesses have stopped trading. Balance sheets have been significantly weakened. Companies will need to mobilise from a standing start with no certainty over what demand awaits them and how well companies in their supply chains have held up.

Moreover, businesses will need to do all this whilst re-engaging staff and implementing social-distancing measures that could fundamentally test the feasibility of their business. This isn’t just a case of bringing everyone back to work. Transitions will be particularly complex in multi-nationals since the pace of recovery will differ within and between countries and sub-sectors. Managing cash and safeguarding business continuity and the health of employees and customers will be evolving and ongoing challenges. Getting the timing right on when and how to start up and invest will be crucial given the uncertainty of the outlook. Companies will need to maintain some flexibility in the event of a second wave.

It’s also important to take a step back and think about what was happening before COVID-19. Profit warnings were already running at exceptionally high, 2008-like levels, reflecting the high economic and structural stresses on the economy. By the end of January 2020, before we recorded any significant number of COVID-19 profit warning, warning levels were already up 43% year-on-year. COVID-19 has added new pressures, but in many ways, these have exacerbated existing issues and accelerated prevailing trends.

Jan YoY

This is exceptionally relevant because most of the sectors that were under significant structural pressure in 2019 – restaurants, retailers, airlines etc – are facing the deepest impact of COVID-19.

We expect to see the most significant increases in distress and restructuring in sectors that were under existing structural pressure, with COVID-19 accelerating and exacerbating existing trends. But, as noted above, almost no company is immune from the wider fall out and potential disruption. It’s vital that companies continue to communicate honestly with lenders and other stakeholders and, where possible, support their supply chains.

Thinking beyond

We don’t know when life will return to normal – or what that normal will be. But we expect to see sectors reshape and for there to be a renewed focus on corporate purpose, long-term value and the interconnectivity between business and society.

“There’s been a lot of talk about purpose, and now is the moment for businesses to show who actually means it.”

Nigel Higgins, Group Chairman of Barclays Bank

This reshaping will be most immediately evident in fundamentally challenged sectors, where we expect COVID-19 to accelerate and exacerbate existing issues, leading to a significant sector restructuring – already evident in  non-food retail and airlines. Deep restructuring in one area is likely to trigger reshaping in others, like real estate and airports. Delays in corporate investment and discretionary spending will have wide ranging implications.

But, there could also be significant variation even within sectors, depending on the level of exposure to distressed areas. For example, between food and drink companies that supply supermarkets are likely to fair better than those who supply into restaurants and pubs.

Overall, companies that can flex and adapt their products and supply lines to new customers and new priorities are likely to fair better. Not least because the drivers of sector reshaping are likely to include new norms in societal priorities, with this shift in values creating permanent behavioural shifts that fundamentally changing the ways we live, work and play.

This potential for fundamental change is highlighted in our latest EY Future Consumer Index, which shows that few consumers expect to go back to their old behaviours. This doesn’t mean that they won’t, but there is clearly a strong sense that priorities have changed. Consumers are showing a greater preference for services that are local, offer value for money (rather than price) and provenance. There is a stronger preference for purposeful brands that they feel are doing good for society.

Our recent CEO discussion underlined the need for companies to remain true to their purpose and long-term values, keeping these at the heart of what they do – especially through the tough times and tough decisions. The more companies look to the longer-term, the more likely they are to make sustainable decisions that deliver long term value to all stakeholders.


You can read more about the latest profit warning data and interrogate the data on our dedicated profit warning web site.

There is more information about EY’s COVID-19 response and advice for companies, on EY’s COVID-19 web site.

EY is hosting a web site on Thursday, 10am  to discuss Workforce Resilience: A Safe Return to Work Environments (replay available via the same link)