9 in 10 profit warnings cite Covid-19 as factor

The vast majority all profit warnings issued by UK-listed companies the first three weeks of March cited Covid-19 as a contributing factor. A study from audit and advisory firm EY shows that the travel, retail and leisure sectors are hardest hit at present.

The Covid-19 outbreak of 2019/20 has spread too rapidly for the containment protocols of the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak to have been effective – partially thanks to the increasingly globalised nature of modern business. While panic continues to spread around the immediate health-related crisis posed by the pandemic, its spread has also led to a mounting crisis for the global economy – with markets which had already been experience sluggish growth looking likely to be shunted into an imminent recession this year.

In the UK, this has already been keenly felt in the aviation sector – where the billion pound industry is currently begging for a tax-payer bailout, as many airlines are grounded thanks to the present lockdown – and the retail segment. Hundreds of high street and ecommerce firms were already reportedly teetering on the brink of insolvency, as declining consumer spending power and spikes in export costs meant many were struggling to balance their books. The massive drop in footfall Covid-19 has caused now looks set to add to that crisis.

Illustrating just how dire the situation is quickly becoming, Big Four professional services firm EY has reported that almost nine-in-ten profit warnings issued by UK-listed companies in the last three weeks cited coronavirus as a contributing factor. According to EY’s report, 87% of profit warnings pointed to the pandemic as a major problem, with 54 profit warnings since the start of 2020 blaming the impact of Covid-19 for a material downgrade to their profit expectations.

The researchers had already recorded an “exceptionally” high level of profit warnings in 2019. The 313 recorded last year was equal to the number at the height of the financial crisis in 2008, and 2020 had already opened in the same way – before Covid-19 exacerbated the issue.

EY Restructuring Partner, Taylor Dewar, commented, “Covid-19 is fundamentally affecting companies’ ability to operate and plan on a global level. As a result, we are recording profit warnings at a pace that far exceeds anything we’ve seen in more than two decades. What is noticeable is the shift in pressure since the start of the month – from Industrials to Consumer Discretionary – as the main driver behind profit warnings moves from supply chain disruption to the impact of ‘social isolation’.”

To that end, Mike Ashley’s Frasers Group has become one of the latest retailers to issue a profit warning, thanks to the “significant disruption” Covid-19 is likely to cause to its business. As a result, Frasers expects that factors such as a decline in customer footfall will probably see it miss its previous guidance of 5-15% EBITDA growth for the year ending 26 April 2020. The group added that it will not give official guidance on its 2020 financial year.

Beyond retail, EY found that more than 40% of the UK’s Covid-19 related profit warnings have come from companies in the FTSE Travel and Leisure sector. 23 companies in the sector suggested this was the case, while beside airlines and tour operators, pubs, hotels, restaurants and cinemas have been hit hardest by travel and social restrictions. Even bookies have been impacted, due to the decline on gambling activity resulting from the postponement of most sporting activities.