JD Sports has been flying high with brands, shoppers and the City, so what has prompted it to consider snapping up beleaguered department store chain Debenhams?

  • JD Sports share price slumps after becoming frontrunner to buy Debenhams
  • Stores offer an alternative to JD’s usual city-centre destinations with people working from home
  • Debenhams website provides access to a “consumer who is very much outside JD’s traditional market”

JD Sports has emerged as the frontrunner to acquire Debenhams and exclusive talks to buy the struggling department store business are underway.

The sports fashion retailer has made a name for itself as a stock market darling that delivers consistent sales and profit growth, and is respected by the powerhouse brands it sells and investors alike.

JD Sports has made a number of acquisitions in recent years that seemed to feed into its overarching goal to become a dominant global force in athleisure retail. Purchases such as Finish Line in the US and Hot-T in South Korea, and its contentious acquisition of Footasylum in the UK, all tie into that mission.

JD’s track record could be about to take a dramatic left turn if the sports fashion titan does seal the deal to acquire Debenhams. While an acquisition has not yet been confirmed, JD is understood to be in exclusive talks about a possible purchase.

Unlike rival Sports Direct, JD Sports has not professed an ambition to create a ‘Harrods of the high street’ or ‘Selfridges of sport’ and, the purchase of fashion label Pretty Green in 2019 notwithstanding, it has pursued an acquisition strategy focused on building a sports fashion and outdoors retail empire – a strategy supported by shareholders.

Against that backdrop, the revelation that JD Sports is in advanced talks about potentially buying Debenhams and the majority of its 124-strong store estate has been a surprise – and triggered a near 8% decline in its share price, at the time of writing.

So what is it about Debenhams that has made it appeal to JD Sports?

Property 

JD Sports New York (4)

JD Sports recently opened a flagship store in Manhattan

If a deal with Debenhams goes ahead, it would not be the first time JD Sports had picked up a business out of administration, though it would be a departure in terms of the scale of acquisitions in the UK until now.

It is understood that JD Sports would aim to keep around 100 of Debenhams’ 124 branches in operation if a takeover is agreed and it would not have significant plans to convert them to large-format JD Sports emporiums – despite having recently launched one of its largest stores to date, a 32,000 sq ft multistorey flagship in New York, earlier this year.

Debenhams, which fell into a ‘light touch’ administration in April, also offers the advantage to JD Sports of having already secured turnover-based or lower rent rates that reflect market conditions since chair Mark Gifford took the helm last year. Debenhams does not own any freeholds and some stores have near-term break clauses, which would mean that if JD Sports acquired it the estate would not need much rightsizing and rental terms have already been improved.

One property expert also points out that Debenhams’ portfolio offers an alternative to the city-centre destinations that make up a large proportion of JD Sports’ estate.

“Debenhams is actually maybe a more interesting proposition now than it was 12 months or so ago, because of the working from home thing. Debenhams stores tend to be on high streets and in smaller towns where previously people maybe lived but didn’t spend too much time until now,” he says.

Online

Debenhams also operates a substantial online operation – Shore Capital ranks it as the 10th largest online retail business in the UK.

Data from SimilarWeb shows that over the last year, online traffic to the business has been relatively strong and consistently ahead of rival House of Fraser and JD Sports, despite waning at points during lockdown earlier this year. Around three-quarters of traffic comes from mobile devices.

As one retail executive with knowledge of Debenhams observes: “Debenhams has a significant digital business that may require investment but still does well over half a billion in sales per year. Having access to that channel and the customer data that comes with it would add a string to JD Sports’ bow and access to a consumer who is very much outside of their traditional market.” 

Diversification

Outside of access to a new demographic and type of store, JD Sports would enter a different type of retail category if the acquisition goes through. Many analysts scratch their heads when asked why JD Sports would want to buy Debenhams – it already has a business model that works well and keeps shareholders happy, and is still working through its recent acquisition of Finish Line, so why create the headache of turning around struggling department stores to boot?

But one analyst observes that JD Sports boss Peter Cowgill may see an opportunity to exploit an existing weakness in the department store market as John Lewis and Marks & Spencer struggle to capture customer imagination and spend.

The retail executive echoes this view: “I would expect JD Sports wants to broaden its profile and an acquisition like this would enable it to enter the space of being a next-generation department store. If you look at Next and Primark that is effectively what they are both becoming – experiential retail, a broadened offer, an increased focus on beauty. The department store isn’t dead, it’s just being reinvented, and not by the pre-existing players. Perhaps JD Sports wants to be a part of that reinvention.”

The retailer has already proven its skills in building strong relationships with big-name third-party brands such as Nike and Adidas – something that has tripped up rival Ashley as he seeks to spruce up House of Fraser. It has already taken steps to diversify its existing model beyond sports fashion through the launch of JD Gyms. Such characteristics, combined with its fascias across sportswear, fashion and outdoors, could give it the ability to fill a department store-sized space by merging the best in class from Debenhams’ existing position in beauty with its own strengths.

It is clear from the share price reaction that JD Sports has its work cut out to convince investors that a deal to buy Debenhams would be a canny move.

But it could be an audacious play by JD Sports, a highly regarded retail operator, to broaden its reach and win new customers.