Comment: Even the best spreadsheets can’t predict the weather

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Retailers are bracing themselves for a frosty Easter weekend as wintry conditions continue to keep customers away from the high street.

Retailers are bracing themselves for a frosty Easter weekend as wintry conditions continue to keep customers away from the high street. Even John Lewis is suffering, with sales figures for the seven weeks to 16 March 2013 rising by just 10.3 per cent, compared with a jump of just under 20% this time last year. The much-loved king of the high street has even resorted to selling fake daffodils for the first time as the relentless cold weather delays the arrival of the spring blooms.

The atrocious weather is having particularly strong repercussions for fashion retail. Customers are coming in looking for coats and gloves, just as store managers are keen to start merchandising their brand new spring/summer collections. Anyway, even if the right stock were in-store right now, few are brave enough to brace the cold and go out shopping.

The only winners might be the self-contained shopping centres like Westfield Shepherds Bush or The Trafford Centre, which may be able to achieve success as they offer shoppers a respite from the cold.

Clearly, weather is one variable that retailers just can’t control - and yet the financial impact of this latest arctic blast is significant. Think about the private equity firms that have gone to great lengths to put together a well-thought out, carefully planned business strategy that maps out the next three to five years. In cases like these, investors assume a certain degree of growth but then suddenly the weather turns and everything changes.

When investors first put together their financing plans, they normally base it around fixed terms, consistent cash flow predictions and certain assumptions about profitability. However, bad weather (and, indeed, good weather) can have a dramatic effect on these calculations. In many cases, the result is that the revised figures simply don’t fit with the original requirements for financing the business.

The repercussions of this shift can be huge - especially if management was already running the business pretty tight to the wire in the first place. In this scenario, a long spell of bad weather can actually tip the business into breaching a covenant, from which it can be extremely difficult to recover. For a start, the banks won’t take very kindly to this sudden reversal of fortunes and credit ratings agencies may be inclined to score the business down. This, in turn, can have a detrimental impact on suppliers, especially if the business has breached any cash covenants and has trouble getting credit insurance as a result.

And just like that, the whole business starts to unravel, and suddenly the banks are in control. It may sound a little dramatic, but it’s not an implausible scenario by any means. Although investors can make a good business case when sizing up a potential acquisition, weather is one thing that a spreadsheet cannot predict.

So what can retailers do in this situation do to ride out the wave whilst they dream of warmer climes? The first thing to do is to be honest with stakeholders: make them aware of your problems, but also reassure them that it is a problem for the entire sector, rather than for any single business in particular.

For all the other retailers out there, it’s worth remembering that things could be much worse. Even if you’re struggling to make summer dresses seem appealing to shoppers who are fighting to keep frostbite at bay, spare a thought for the retailers who may not get the chance to see another summer.