Nearly 400 retailers, including big high street names like New Look and Mothercare, could struggle to make higher debt repayments if interest rates go up as expected this year, a new report claims.
A study by financial analytics firm Company Watch of 1,625 retailers with total assets of at least £5million found that 392 companies were in its ‘warning area’, meaning they were 25 times more likely than fellow retailers to suffer financial distress.
Among those at risk were also Carpetright, Caffe Nero, fashion chain Forever 21, Poundland, Debenhams, Conviviality, AO World, House of Fraser and Paperchase.
At risk: Firms like New Look and Mothercare could struggle if interest rates go up
Company Watch compares the financial strength of companies using a scale from 0 to 100, with companies that score 25 or less falling in its ‘warning area’.
It analyses the firms’ published financial results by focusing on liquidity, working capital, funding and debt dependency.
It said that not all companies in its warning area will fail, but of the companies that do fail, the ‘vast majority’ were in it prior to collapse.
High street retailer Maplin, which went into administration just weeks ago, had a score of 3. New Look currently has a score of 9, Mothercare a score of 12, Carpetright a score of 18 and AO World a score of 24, according to the report.
Caffe Nero, which hasn’t paid a penny in UK corporation tax in a decade, has a score of 1. Its parent company made a £25.5million loss in its last financial year.
In fact, Company Watch also found that more than a quarter of retailers in its sample, or around 430 firms, were loss-making. These include including retailers such as Hobbs Fashion, Mamas & Papas, Missguided, Thomas Pink, Sofa.com, TM Lewin, Paperchase, Sofology, Crew Clothing, Forever21 and Crocs UK Ltd.
‘Warning area’: Carpetright had a score of 18, with scores of 25 or under indicating risk
The report comes as the Bank of England is expected to raise interest rates twice this year – in May and November or December.
Interest rates are currently at 0.5 per cent and possible future increases would only be small.
Company Watch said that if the base rate were to double to 1 per cent this year, another 60 companies or so were likely to become loss-making.
‘If base rates were to double from 0.5 per cent to 1 per cent 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 per cent to 492 (30.3 per cent),’ it said.
Financially robust: Retailer Next, which scored 87
Concerns over the health of UK high street have increased in recent weeks after the collapse of Maplin and Toys R Us and the announced closure of a raft of restaurants.
Chains Jamie’s Italian, Prezzo, Byron and Strada have all been forced to announce closures over recent weeks with more considering restructuring.
Earlier this month, Mothercare insisted it was still generating cash after speculation that the company could be the next retailer to shut up shop.
Company Watch chief executive Jo Kettner added: ‘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.
In good health: Patisserie Valerie has a top score of 100, according to the report
‘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.’
The report also found that some of the most financially robust companies were retailer Next, which scored 87, Patisserie Valerie, with a top score of 100, fashion house Burberry, which scored 95, menswear firm Moss Bross (score of 89) and department store Fenwick (score of 96).