Analysis: Can battered Debenhams be turned around?

A year on, dismal full-year numbers from the embattled business would lead some to question his statement.

Debenhams may have served 19 million customers last year, but gross transaction value fell 1.8% and UK store like-for-likes slid 6.3%.

Underlying profit plunged 65% to £33.2m and, on a statutory basis, the retailer racked up an unprecedented £491.5m loss, although that mainly reflected non-cash exceptional write-downs.

Punishing market conditions have convinced Debenhams to swing the axe on up to 50 stores over the next three to five years.

If successful, that plan will help put the business on a sustainable base and safeguard jobs, but colleagues in underperforming stores will be fearful about the future.

It is thought that as many as 4,000 jobs could go altogether as Debenhams slashes costs by £50m by, for instance, cutting central office overheads and automating warehouses.

And as for shareholders? Debenhams’ stock, which over 52 weeks has been as high as 47.3p, languished, at the time of writing, at 9.51p.

However, that represented a big rise on the morning’s opening price of 8.5p, indicating that, despite having had an unforgiving year, Debenhams may not be destined for the dustbin of retail history, having been a high street presence since 1778.

That is the view of Rachel Osborne, Debenhams’ new chief financial officer, who joined in September from Domino’s Pizza – and is playing a key role in stabilising a balance sheet on which Debenhams can build.

The costs of running bricks-and- mortar stores may be rising, but cutting Debenhams store numbers by almost a third from 165 at present might seem surprising.

Until now, Debenhams has maintained that stores were a lynchpin of its social shopping strategy, tying into the trends of increased spending on leisure and desire for great experiences.

Only last month the retailer was showing off its new Watford branch which, following in the footsteps of Stevenage, epitomised its in-store ambitions.

Debenhams says that it does not have a long tail of loss-making branches, so what has changed?

“What’s changed in the last 12 months is that the market’s become a lot tougher,” Osborne explains. “We’ve taken a stance that we’re not going to get any help from the market. In five years up to 50 [stores] will potentially be loss making.”

Some think Debenhams should act faster to shut shops. Osborne argues that “it wouldn’t be a good idea to close stores that are making cash profit right now” but observes: “The shift to online isn’t going to stop, you need to look at the market now and what will stand us in good stead in five years.”

The stores that remain will, to varying degrees, reflect what Debenhams chiefs believe represent a viable future.

Stevenage has “consistently outperformed expectations” in its first trading year. Osborne declines to give specific numbers, but says it has the best rate of full-price sell-through in the chain and delivers the best average transaction values.

But as it slashes capital expenditure in half, to just £70m in 2018/19, can Debenhams create stores that replicate the apparent success of Stevenage?

Investment will be allocated to initiatives including store enhancements. The retailer will incorporate elements of its new beauty hall design – beauty is a key category – in 40 branches, for instance.

Osborne insists that stores will not be starved of investment. She points out: “A large part of the [capex] reduction is coming out of systems costs. It’s not the front-facing side that’s as much affected as you might imagine.”

She says landlords contribute significantly to store overhauls and says that there should not be excessive focus on shops in themselves. “We don’t sell stores, we sell product. We’re confident we can roll out the best of Debenhams.”

As evidence, she references its performance in womenswear, a category in which Debenhams increased its market share last year.

An ongoing overhaul of own-brand designer labels has helped fashion performance. Ben de Lisi and John Rocha have been phased out and London Fashion Week award winner Richard Quinn introduced.

Debenhams said: “With upgraded fabrics in Designers and product that is better differentiated and ‘true to brand’ we have seen faster sell-through despite the wider discount-driven environment.”

However, one category where Debenhams has not done as well as might have been hoped is beauty, one of its main areas of focus and the centrepiece of the Watford store.

According to the retailer, the beauty market slowed down over the year and there was a “negative performance” in make-up, its strongest category, leading to a 0.8% decline in beauty sales.

Osborne acknowledges that Debenhams has been guilty of some mistakes. “We didn’t invest enough in younger, innovative brands. We’re fixing that,” she says.

The retailer is confident, however, that the progress made in beauty, epitomised at Watford, will put it on track.

New brands will be showcased in 40 ‘labs’, which will trade in time for peak. New categories – such as premium haircare – will be exploited and it will make the most of its new BeautyClub Community, a social media venture also deployed in-store, and its 1.3m BeautyClub membership.

The importance of digital to the developing beauty proposition is mirrored more widely as Debenhams drives online to account for 30% of sales, versus about 20% at present.

Debenhams will continue to invest in its digital operations as it strives to reach that 30% target. Osborne says that its digital experience platform Mobify, already used to launch a new mobile site, gives it greater agility than in the past.

From February next year, the retailer will move desktop customers to the Mobify platform, “providing a consistent and scalable experience across all our customer-facing digital channels”.

Digital initiatives are also being deployed in other ways to improve stores. The retailer reported: “We are using online analytics to support range decisions based on customer search behaviour – and this will include the introduction of highly sought after ‘hot’ brands and products.

“We are bringing our channels closer together. We are leveraging the huge growth in local mobile search to raise our visibility on key products and brands and we are working with Google to surface local store information alongside visual shopping ads to drive traffic into stores.”

But just as is the case with other retailers, getting the balance of sales and profitability right will be essential – particularly as shops close.

Osborne says Debenhams’ digital division achieves “the same level of EBITDA per cent margin”. But is it growing fast enough to compensate for lost store sales? There have been signs of comparatively lacklustre ecommerce growth across the market, but Osborne says: “I think this is a cyclical rather than a structural issue.”

Despite today’s poor numbers, Osborne is adamant that Debenhams has a future to look forward to and it will not follow the same path to collapse as department store peers BHS and House of Fraser.

“What we have is a very clear customer proposition and strategy, and thankfully we started working on that 12 months ago,” she says. “There’s a stronger balance sheet to grow the bottom line from. The market is going to be of no help and we are self-helping.”

If so – and it must be a big if – that should ultimately be good for customers, colleagues and shareholders, just as Bucher hoped.