A new study of over 1600 larger UK retailers with total assets of £5 million or over by Company Watch, the financial analytics firm, found over a quarter were financially vulnerable to rises in interest rate costs this year.
Company Watch reviewed the latest published full-year financial accounts of 1625 UK retailers. It found that 392 (24.1%) companies were in its Warning Area (H-Scores 25 or under), which means they are around 25 times more likely to suffer financial distress than those outside of it.
The Company Watch study also found that 430 (26.5%) companies in its sample were loss-making which included many household retailers such as Hobbs Fashion, Mamas & Papas, Missguided, Thomas Pink, Sofa.com, TM Lewin, Paperchase, Sofology, Crew Clothing, Forever21 and Crocs UK Ltd.
Company Watch compares the financial strength of companies using its unique H-Score methodology. Companies with the weakest financial structure score zero, while the strongest score up to 100.
In the past 12 months Company Watch flagged well-known retailers which went on to fail, including Maplin (H-Score of at the time of failure 3), Jaeger Limited (H-Score of 11), Jacques Vert Group Limited (H-Score of 15), Theo Fennell Limited (H-Score of 1) and East – owner of Joe Bloggs (H-Score of 4).
In recent weeks, there has been speculation – which the BoE governor Mark Carney has done little to dampen – around two base rate rises this year, the first expected in May and the second around November or December.
If base rates were to double from 0.5% to 1% this year, by applying these higher debt costs to the interest, loan, and overdraft charges detailed in the latest filed accounts, Company Watch predicts that the number of loss-making retailers would increase by around 4% to 492 (30.3%).
Weak H-Scores are by no means universal among UK retailers. Many are financially robust and this is reflected in their high H-Scores. Some of the strongest retailers include Patisserie Valerie (H-Score of 100), Next PLC (H-Score of 87), Burberry Group PLC (H-Score of 95), Fenwick Limited (H-Score of 96), and Moss Bros (H-Score of 89).
Jo Kettner, CEO of Company Watch, said“It’s no secret that bank base rates are set to rise this year at least once and maybe twice. For many of the household name retailers that are loss-making and already in our Warning Area, a rise in the cost of debt this year could well be the final straw. Retail suppliers and trade creditors are monitoring this situation closely and will be looking for signs that appropriate action is being taken by retailers to prepare for higher interest rates.”