Corporate Finance

FTSE retailers issue more than a years’ worth of profit warnings in H1

FTSE retailers issued 47 profit warnings in the first half of 2020 (H1), far exceeding the total number recorded in the sector in the whole of 2019 (32), according to EY’s latest Profit Warnings Report.

In Q1 2020, EY recorded 38 warnings in the FTSE retailers sector followed by a further nine in Q2. Unsurprisingly, more than three quarters (36) of the warnings issued by listed retailers in the first half of the year (H1 2020) cited Covid-19 as the reason for announcing a material downgrade to their profit expectations.

After a record breaking first quarter in 2020, when UK quoted companies across all sectors issued 301 warnings – almost equivalent to the full-year total for 2019 (313) – EY recorded 165 profit warnings in Q2 2020, which was almost 100 more than the same quarter last year and a 139% year-on-year increase.

EY revealed that profit warnings from consumer-facing companies were “less prominent” in Q2 2020, however this is only after an “exceptionally” high level of warnings and forecast adjustments in March.

The FTSE retailers and FTSE travel and leisure sectors were still found to have the highest number of companies warning three or more times in a 12-month period, which EY analysis suggests gives a company a “one in five chance of experiencing a distress event” – such as an administration, CVA, debt restructuring or distressed sale – in the year ahead.

Mona Bitar, consumer Leader at EY, UK and Ireland, said: “While lockdown restrictions have eased, providing some relief for FTSE Retailers, footfall remains well below pre-pandemic levels and uncertainty remains.

“The impact of Covid-19 has dramatically accelerated the shift in consumer behaviour, requiring retailers to adapt at an extraordinary pace. But what is certain, is that retailers cannot afford to continue as usual, in the hope normality will resume soon, almost all will need to undertake some transformational and turnaround activity to help see them through.”

According to EY’s report, ‘specialty retailers’ issued the most profit warnings (17) in the FTSE Retailers sector in H1 2020, followed by ‘Apparel Retailers’ (15) and ‘Home Improvement Retailers’ (10). ‘Diversified Retailers’ issued the least number of warnings (5).

Bitar concluded: “Latest economic data shows that consumer confidence is on the rise. The share of British adults who felt comfortable heading to the shops in June doubled when compared to May, according to EY’s Future Consumer Index.

“However, retailers will need to factor in a likely fall in consumer spending in the second half of this year, triggered by a predicted rise in unemployment following the wind down of the Government’s furlough scheme.”

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