Wilko sounds alarm over funding if sales deteriorate

UK value retailer Wilko warned it could run out of cash by the end of next year if trading worsened, highlighting the pressure from cost inflation and a squeeze on consumer spending.

The privately owned company expected same-store sales volumes to fall this year and stabilise in 2023, with price rises and operating cost reductions boosting profit margins.

But in its results for the year to January 2022, it cautioned that under a “severe but plausible” trading scenario in which sales fell and it failed to secure additional financing, it could exhaust existing sources of funding by the end of 2023.

The company, which has historically relied on short-term overdrafts, supply chain finance and internal cash generation for its funding needs, said it was “confident” it would secure new financial backing and was “in active discussions in that regard”. The bearish trading scenario was “unlikely” it noted.

A possible source of new funding would be Bantry Bay, the specialist lender backed by Elliott Advisors, which has already provided a £60mn term loan to Matalan and is in discussions regarding a similar facility at clothing brand Superdry.

Such lenders typically extend credit secured against the borrower’s inventory or other assets and charge higher interest rates than conventional banks. They may also require an enhanced position in a company’s credit structure; Bantry’s loan to Matalan is a “super-senior” facility that ranks above the company’s senior bondholders in the event of a default.

Wilko has already sold and leased back its headquarters in Nottinghamshire, raising £48mn to pay down its revolving credit facility. Following that transaction, which completed this month, it had £63mn of cash.

It is looking at other costs, in particular its 400-strong store estate. It said there were “opportunities to improve profitability” at around 70 of those stores, either through renegotiating lease terms or improving the offering to customers.

But unlike rivals, which have rotated their store estates to out-of-town locations, Wilko stores are mostly in shopping malls and town centres, where customer numbers have been slower to recover after the pandemic.

Wilkinson Hardware Stores, the holding company for the group, reported a pre-tax loss of £36.8mn for the year to January, against a £4.4mn profit the previous year, and there was a £49mn cash outflow. Revenue fell to £1.2bn with same-store sales declining 3.3 per cent.

The year included several periods of lockdown, which reduced shopper numbers, although Wilko benefited from its significant exposure to the gardening and DIY sectors.

WHS is still controlled by a Wilkinson family entity, which received £3mn in dividends during and immediately after the financial year. The company has been contacted for comment.

Value retailers have generally prospered during periods of economic uncertainty, but the impact of cost inflation compounded by a strong dollar has made the current environment more difficult.

B&M recently reported a fall in sales and profits in the first half of its fiscal year while Poundland owner Pepco has said UK trading conditions “remain challenging”. Shares in both have fallen over the past year.