(This article was updated on 4 August to add comment from Jonathan de Mello).
Budget general goods chain Wilko, which has 400 stores across the UK, has filed a "notice of intention" to appoint administrators after failing to raise enough emergency financing.
Chief executive Mark Jackson said it was continuing to talk with interested parties about options for the business and hopes to find a solution as quickly as possible to "preserve the business".
It appointed PwC in recent months to try to find a buyer while CBRE was appointed to review its real estate portfolio before talks with landlords began. The group has not confirmed whether any jobs or stores would be affected by an administration.
The retailer has been increasingly expected to proceed with a compulsory voluntary arrangement across its estate, with the Sunday Times first reporting that this could see it seeking rent reductions at as many as 240 of its 400 stores but no store closures.
CVAs have been little used in the last two years as market conditions have improved for retailers. They are legally binding agreements with a company's creditors to allow a proportion of its debts to be paid back over time and need 75% of the creditors, by value, to support the proposal.
Rising energy costs, inflation and interest rates have all been expected to lead to distress in retail, potentially prompting a return of CVAs. Experts suggest that if they do re-emerge, they will be very different to the formula used in the past.
Jonathan de Mello, founder and CEO of retail consultant JDM Retail, says CVAs are potentially dangerous for retailers like Wilko as much as landlords. "The likes of Wilko are reportedly suggesting that they do not plan to close any stores as part of the process. They run the risk of landlords forcing them to do so – as is their right – if Wilko also demands lower rents, and there are headlines that they ‘might not pay rent for three years'. This could well lead to Wilko losing some of their best and most prime stores to other operators, with quite a few retail and leisure operators in active discussions with Wilko landlords currently."
Wilko has been on a major cost-cutting exercise in recent months, agreeing a £40 million funding package in January with turnaround business Hilco UK. It posted a £36.8 million loss in its recent full-year results thanks to increasingly difficult trading conditions.
In January Canadian asset manager Brookfield agreed to buy the headlease on the budget retailer's 1.1 million-square-foot distribution hub in Worksop in Nottinghamshire from third-party logistics specialist DHL for £88 million or a 5.75% yield.
The transaction was structured as a sale-and-leaseback transaction with DHL only two months after Wilko agreed a £48 million, 15-year sale-and-leaseback with the logistics company on the hub, with DHL retaining the headlease at the time. That deal enabled Wilko to pay off its revolving credit facility.
De Mello added that store closures and job losses are inevitable and partly blamed underinvestment in the stores: "Wilko are on the brink of administration, with thousands of jobs at risk. Current cost of living issues are certainly a major factor in the issues they now face – with a concurrent reduction in discretionary spend, and ever-rising supply chain and wage costs. However, Wilko have also suffered from poor decision making by management over the years, and chronic under-investment in their physical store network. Competition has also played a big part – with the likes of Home Bargains, B&M, The Range and others all taking significant market share from them."
"Whilst the new team they have put in place together with Hilco seem competent, they haven’t had enough time or money to turn the business round. Any potential buyer would not want to take on the significant debt Wilko has, and inject yet more capital into the business at this time. There will be suitors for the business for sure – but they will at this point be waiting for the company to go into administration, before seeking to acquire the best parts of the business as it stands – without the debt.
"No buyers will want to take on 400 plus stores either – many of which will deliver little contribution to overall profitability. A significantly smaller estate is required if the brand does indeed continue to trade. This would of course mean the sad loss of thousands of jobs, even in the best case scenario for the business."