In news that surprised everyone from shoppers to investors, general retailer Wilko announced in early August it had filed a ‘notice of intention’ to appoint administrators due to mounting cash pressures on the business.

The firm, whose stores are a feature on most UK high streets, is reportedly losing market share to rivals such as B&M European Value (BME), Home Bargains and The Range.

Compounding its problems, the retailer has struggled to fill its shelves this year after suppliers stepped back due to the withdrawal of credit insurance in late 2022.

According to filings, Wilko made a loss of nearly £36 million in its last financial year, more than it made in profits in the previous four years.

As we have flagged in the past, cash is key and companies which fail to convert enough of their sales into cash are always at risk of falling into a ‘liquidity trap’.

Wilko is reported to be trying to raise up to £70 million in emergency financing on one hand, while working with property firm CBRE to file a CVA (company voluntary arrangement) to reduce its store rents on the other.

CVAs were a big feature of the retail sector several years ago with companies like Arcadia and BHS filing for protection from creditors, and according to Statista in 2020 property assets under CVA at big shopping centres like Lakeside were as high as 28%.

Trade journal Retail Gazette reported Wilko could look to suspend rent payments to some landlords for up to three years which would be a big blow to the companies affected.

AEW UK REIT (AEWU) has direct exposure to Wilko through its Union Street unit in Bristol, which accounted for 2.6% of the total passing rental income portfolio as of 31 March this year.

While 2.6% isn’t a huge amount, AEW’s dividend was only 89% covered by income in the last quarter of 2022, with the balance coming from asset sales, so progress towards the firm’s target of 100% dividend cover is likely to be delayed, which could force the board to err on the side of caution and reduce the payout.

There is a feeling that if a big firm like Wilko can fall into financial trouble, more retailers are likely to follow, and subsequently we heard the news that Clintons was considering closing a fifth of its stores in order to stem losses.

Hopefully both firms will find the support they need, but there is bound to be a reduction in store footprints with, we suspect, less emphasis on the high street and more on retail parks.

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