Debenhams today announced the worst annual results in its 240-year history, with a staggering £491.5m loss.
Though these losses are largely owing to one-off asset writedowns, including a £118m impairment on store values, like-for-like sales were also down 2.3%.
The decline served to highlight the wider underlying issue of falling demand that has plagued department stores globally, but particularly in the US and UK – markets that have more of a culture of department store anchoring than other countries.
The issue for Debenhams is the sheer size of its property portfolio. The 166-store estate is hugely oversized when compared to House of Fraser’s 57 stores (a number of which are slated for closure) and the 50 operated by John Lewis.
The advent of multichannel retailing – and the fact that many concessions that formerly exclusively traded in department stores are now opening their own standalone stores – means that such a large portfolio of physical stores is no longer needed.
However, Debenhams has signed long leases on the majority of units, at rents which are now unfavourable in today’s market.
Despite that, chief executive Sergio Bucher has insisted that all Debenhams stores do make a profit. But my estimate is that 70% of Debenhams’ profit is generated by the top 40% stores.
This leaves a very large ‘tail’ of circa 99 stores that contribute comparatively little to the business. And the issue with these shops is that if current market trends continue, and Debenhams’ like-for-like sales slump further, then many will be pushed into an unprofitable position.
This is partly down to the cost of operating such stores, with inflexible, upward only leases and the additional hammer blow provided by business rates. Debenhams has an estimated annual rental bill of £225m and pays about £80m in business rates.
Too little, too late?
It is for this reason that Debenhams has announced it will be closing up to 50 stores in the next three to five years, with up to 4,000 jobs at risk as a result.
The issue with this plan is that, if you assume nearly 100 stores could be pushed to an unprofitable position as early as next year – particularly following Brexit – then these closures could be too little, too late.
My view is that Debenhams will need to make more drastic changes – the sooner the better – particularly given how close one of its keenest rivals, House of Fraser, came to extinction because of similar lack of action.
I would not be surprised at all if, further down the line, Bucher reveals ‘deeper’ store closures of 75-plus stores. He has already gone from announcing 10 closures to 50 in a very short space of time, after all.
Debenhams does have 25 leases up for renewal in the next five years, but to close 50 in that time frame will be extremely difficult – unless, of course, some form of CVA, administration or pre-pack deal is enacted.
Sports Direct tycoon Mike Ashley is clearly waiting in the wings. Given his existing 29% stake in Debenhams and his ownership of House of Fraser, there is an obvious play for him here to acquire a controlling stake in Debenhams, and merge the two department store businesses.
This could potentially be a smart move, with House of Fraser focused on a younger customer trading in urban areas, and Debenhams targeting a slightly older clientele in suburban locations.
Either way, the optimal store portfolio of any combined entity would need to be drastically smaller than it is today.
Debenhams, therefore, is right to take the axe to its estate – but its proposed cuts may prove to be too light and too late.
- Jonathan De Mello is head of retail consultancy at Harper Dennis Hobbs