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Beware the high street meltdown

Created:
8 October 2008
Updated:
9 October 2008
Written by:
Risen Dennis

Dividends are likely to be cut as retailers seek to conserve cash and, some high street names will go bust, a leading corporate insolvency specialist has warned.

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Begbies Traynor believes 323 UK retailers are at risk of going under in the New Year as they struggle to meet debt obligations. The estimate may be on the high side, and Begbies has an obvious vested interest, but the auditors of JJB Sports have already warned that there is significant doubt the business can continue as a going concern. In addition, JJB's credit insurers have pulled their cover. Without insurance, suppliers can insist on better terms or not supply goods at all.

Not all retailers are heavily indebted, and some of those that are, are supported by steady cash flows from robust domestic and international businesses, significantly reducing the risk of default. But there have already been a spate of dividend cuts, and more are likely in the New Year. Treat any superficially high yield with a pinch of salt.

Takeover support has also largely disappeared, thanks to the withdrawal of private equity bidders. Adding to the woe is this week's Icelandic collapse: Baugur has stakes in Debenhams and Moss Bros, plus a whole host of unquoted retailers like Hamleys and Iceland.. A 13 per cent block of Baugur's Debenhams shares are reportedly being sold by Landsbanki, and there's also a big overhang at supposedly defensive food retailer Sainsbury.

That's held by Robert Tchenguiz, who has sold his 25 per cent stake in Mitchells and Butlers, after financial backer Kaupthing bank called in the loan. His 10 per cent stake in Sainsbury is up for sale at 250p a piece, which has hit Sainsbury's share price, despite the fact that the food retailer posted positive second-quarter numbers yesterday.

IC VIEW:

Retailers are already squeezing their suppliers as hard as they dare, and with cash flow under pressure, those with high debt levels could face covenant breaches. That leaves them at the mercy of banks, who are hardly in charitable moods at present. On that basis, JJB and Moss Bros are best avoided, along with Debenhams. On the flip side, those that emerge better off from the Christmas period may offer value after the savage recent sell off.

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