More than a quarter of UK retailers, with total assets of £5m or more, are financially vulnerable to rises in interest rate costs this year, according to a new study.
The study, carried out by financial analytics firm Company Watch, analysed a total of 1,625 retailers using its H-Score methodology. This method uses a company’s published financial results and quantifies how closely they resemble those of companies which subsequently failed.
Companies with the weakest financial structure score zero, while the strongest score up to 100. Company Watch classes firms with a score of 25 or below as being in its warning area.
The study found that 24 percent of companies were in its warning area, which means they are around 25 times more likely to suffer financial distress than those outside of it.
The study also found that around 26 percent of 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.
In the past 12 months Company Watch flagged well-known retailers which went on to fail, including Maplin, Jaeger, Jacques Vert Group, Theo Fennell and East – owner of Joe Bloggs.
However, Company Watch said there are many financially robust companies which include Patisserie Valerie, Next, Burberry Group, Fenwick, and Moss Bros.
It also said that in recent weeks there has been speculation that there will be around two base rate rises this year - the first expected in May and the second in November or December.
The company said the number of loss-making retailers would increase by around four percent to a total of 30 percent, if base rates were to double from 0.5 percent to one percent this year. This calculation is based on applying these higher debt costs to the interest, loan, and overdraft charges detailed in the latest filed accounts.
Jo Kettner, chief executive 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.”