SHARES in McColl’s Retail Group surged by 11 per cent, despite a dividend cut and fall in profits, after the firm signalled an improvement in trading fortunes.

But the retailer warned it may ultimately have to open talks with its bankers over its credit facilities in the event of a disorderly Brexit. The UK is due to leave the European Union (EU) on March 29 with Parliament yet to rubber-stamp any form of withdrawal agreement, sparking fears the country could crash out the bloc without a deal.

McColl’s, which trades as RS McColl in Scotland, said like-for-like sales had dropped by 1.4% in the year ended November 25 on the back of supply chain disruption caused by the failure of Palmer & Harvey. The wholesaler had supplied 700 McColl’s stores. McColl’s now has a wholesaleale deal Wm Morrison, which supplies around 1,300 of its 1,550 stores.

Profits at McColl’s dropped to £7.9 million from £18.4m, with the company slashing its full-year dividend to 4p per share from 10.3p in 2017.

“We need to give careful consideration to our cash allocation, striking the right balance between investing in the business, reducing our debt and providing returns to shareholders,” McColl’s said.

However, the firm said trading has improved early in its current financial year, with like-for-like sales up 1.2% in the 11 weeks ended February 10.

McColl’s informed the City it has run a series of models on the impact Brexit could have. These include product shortages sparking a short-term sales reduction of around 11 per cent in April and May, as well as pressure on margins and higher cost inflation.

It said the sales decline would then moderate to two per cent, “as customers migrate to new products and/ or supply chains stabilise”.

McColl’s added: “In both the short and medium term considerations it is expected that the majority of product cost inflation would be passed on to customers and therefore could be mitigated overall.”

“While in the short term the covenant headroom is tighter, having modelled these scenarios and the mitigating actions, the directors remain confident that the business is a going concern.”

However, McColl’s warns that, “in the event of a far more challenging Brexit... there remain a number of further mitigating actions that could be taken, including significantly reducing capex and dividends and, for the most severe outcomes, reviewing our current arrangements with our supportive baking syndicate.”

McColl’s opened talks with its syndicate to make changes to its banking arrangements last summer to “give us more flexibility to execute our business plans”. The firm had re-financed in 2016 to fund the acquisition of nearly 300 stores from the Co-operative Group, giving it a £100m working capital facility and a £10m repayment term loan. At November 25, the company said drawings against its facilities stood at £125.5m, down from £154.5m last year.

Shares in McColl’s closed up 5.8p at 56.4p.