Wilko enters administration amid cashflow strainby
Discount homeware retailer Wilko collapsed into administration this week after it was impacted by supply chain issues and the cost of living crisis, which resulted in a deterioration of trade.
The British high-street staple, which stocked everything from toothbrushes to gardening tools, called in administrators from PwC on 10 August but will continue to trade without any immediate redundancies as it seeks a buyer.
The budget retailer, which has 400 stores across the UK and around 12,500 employees, had hoped to have found an eleventh-hour buyer when it filed a notice of intention to appoint administrators last week.
Zelf Hussain, joint administrator and PwC partner, said the management team had “left no stone unturned in trying to save the business”.
He added that the business, which has been a high-street staple for more than 90 years, was a victim of tough economic trading conditions and this ultimately led to increased cashflow pressure.
“Many high street retailers are facing a number of well-documented challenges and Wilko has been significantly impacted by the headwinds facing the industry including inflationary pressure and rising interest rates,” continued PwC’s Hussain.
PwC said it will continue to engage with parties interested in acquiring all or part of the business, adding that the stores will continue to trade as normal and staff will continue to be paid "for the time being".
Collapse was clear in financial statements
The collapse is not out of the blue and has happened in slow motion over the past 12 months.
The company generated a pre-tax loss of £38.7m on a turnover of £1.2bn for the financial year ending January 2022 but still paid shareholder dividends of £2.25m. Post year end, the board paid a third interim dividend of £750,000. Meanwhile, cash at bank and in hand dropped by 46% from £107m at year-end 2021 to £58m at year end 2022.
In the previous year, turnover had been around 3% higher at £1.28bn but pre-tax profits were solid at £5.5m.
Although the financial statements for the year ended January 2022 had been prepared on a going concern basis, they did reveal further turmoil for the company, noting: “Since January 2022, trading conditions have remained challenging, with consumer confidence continuing to be fragile, ongoing supply chain disruption and rising cost inflation.”
These conditions were spelled out in the accounts, which showed that the volume of sales had gone down with the gross profit decreasing by 4.6%. On top of that, Wilko stated that its administrative expenses had increased by 3.5%, which it put down to the increased costs of inflation and energy costs.
The director’s report for January 2022 assumed that the upward pressure on inflation and economic uncertainty would continue, as a result of the ongoing conflict in Ukraine. It also stated that like-for-like sales volume would remain in decline throughout 2022. Wilko had planned to have stabilised sales volumes through “price inflation” and rolled out a programme of cost reductions to be more operationally efficient to combat high energy and labour costs.
In the strategic report that accompanies the accounts, the company pointed out the impact Covid had on its trading conditions which disrupted footfall, in addition to the “severe and widespread” disruption to supply chains. It had to shut a store during the same period and also proposed the closure of 15 stores at the start of 2022. The number of full-time employees had also been reduced for FY2022, from 8,485 to 8,260.
Credit insurance pulled
But the situation took a further turn for the worse and the collapse snowballed late last year. Ollie Maitland, the co-founder of Capitalise.com, pointed out that Allianz Trade and Atradius pulled credit insurance cover for Wilko in October which set off a supply chain reaction. As a result SME suppliers were not able to cover trade with Wilko.
Then six months ago, the Credit Reference Agencies downgraded Wilko into maximum risk. Maitland noted: "Their early visibility will have been a commercial advantage to companies in the supply chain."
He added: "The financial system is highly interconnected and so preventative measures, early action is required to protect companies. Otherwise it's too late."
Insolvencies hit the high street
Tom Davey, director and co-founder at Factor Risk Management, said Wilko’s collapse is a sign that the squeeze on UK consumers’ spending powers is having a knock-on effect for the retail industry.
"After a torrid period during the pandemic, and with continued supply issues and rising interest rates, many retailers will find the conditions impossible to survive in their current guise and we expect to see an increasing number of high-profile companies restructuring and facing fire sales as a result of this.
"For companies such as Wilko, cheap capital has disappeared and this has led to a noticeable rise in both corporate and personal insolvencies over the past year. These figures are only likely to worsen.”