EY: a third of FTSE retailers face financial cliff edge after multiple profit warnings and reliance on government support

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More than a third of listed retail companies are facing a potential financial cliff edge, having issued two or more profit warnings since March 2020 and made a claim for government support in December, according to the latest EY analysis of profit warnings.

Between the beginning of March 2020 and March 2021, 35% of FTSE Retailers (15 companies) issued at least their second consecutive profit warning and claimed furlough in December. Only the FTSE Travel and Leisure sector had more companies (23) with two warnings and a furlough claim in December.

Eight of the FTSE Retailers (19% of the sector) that claimed furlough in December had also issued their third or more consecutive profit warning within the last 12 months. Statistically, up to one in five of these companies have historically entered Administration within 12 months of the third warning.

In total, 174 UK listed companies issued at least their second profit warning between March 2020 and March 2021, with 44% (77) of them claiming furlough support in December 2020.

Mona Bitar, EY UK & Ireland consumer leader, said: “COVID-19 has had a significant impact on the sector and it’s clear that the road ahead will be challenging. When non-essential stores reopen in a few weeks’ time, the likelihood of survival for many will become clear and this could result in rapid consolidation.

“Reopening also gives retailers a golden opportunity to re-engage customers and take advantage of pent-up consumer demand. Retailers need to be prepared for customers looking forward to the more personal in-store experience – not just for the immediate post-lockdown period, but for the longer-term. Physical stores will be increasingly experience-led, focused on offering events and activities that give customers engaging reasons to visit. In a reimagined way, bricks and mortar retail is still going to be very important to the future of the sector.

“With continued growth in online sales, retailers must look to integrate their channels, as well as continuing to improve their online offer. They must avoid the risk of running parallel business models which will result in reduced productivity, and split capital and overall investment activity. Retailers will need to continue focusing on cost reduction and finding capital for investment in new revenue channels.”

Within the 12-month March 2020-2021 period, 63 UK listed companies issued at least their third profit warning – almost double the 2019 total of 32.

More than half (35) of these companies claimed furlough support from the Government in December, and one third (21) are also claiming at least one other form of government support, including a CLBIL/CBIL, a CCFF, and/or the deferral of business rates and VAT.

In total, there are eight companies with three or more profit warnings that claimed more than £1m in December.

Alan Hudson, EY-Parthenon UK&I turnaround and restructuring strategy leader, said: “The extent to which some of the UK’s largest firms have had to claim government support through the pandemic is evidence of the challenging environment in which many businesses have found themselves. Firms’ dedication to securing their future and continuing to provide for their customers, clients and employees is clear, but as government support comes to an end, many firms could be tested to their ultimate limit.

“But even the stronger firms could face issues, and supply chain resilience has never been more important. Disruption to even the smallest supplier could create significant challenges that ripple through the economy.

“The transition away from Government support measures won’t be straight forward, and could require a wholesale shake-up of firms’ strategies, recapitalisation models and operations if they are to avoid hitting a financial cliff edge.”

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