Today’s results represent good progress for Debenhams against the backdrop of a marketplace that remains challenging.
Today’s results represent good progress for Debenhams against the backdrop of a marketplace that remains challenging. While the overall sales picture looks rosy – particularly in online where Debenhams has made some real strides thanks to some concerted efforts to improve its multichannel proposition – underlying these sales figures is a flat group gross margin and a decline in pre-tax profits of 2.7%.
Sales growth will be particularly heartening given that 2013 began in inauspicious fashion for Debenhams as a period of poor weather in the UK contributed to a significant fall in LFLs in January 2013.
The response to the snow-inflicted damage of January was predictable, with Debenhams launching heavy promotional activity in February in an attempt to drive a turnaround in sales. This has the effect of eroding margins, with a profit warning following in March.
The impact of the weather was again the story of Debenhams’ sales over summer; though this time a strong performance reflected the positive impact of hot weather on seasonal clothing sales. All retailers are subject to a degree of exposure to changeable weather, but Debenhams’ frequently promotion-led response leaves it more open to short-term hits and misses than most.
It would be unfair, however, to characterise Debenhams as being blinded by short term gains. Building a suite of sub-brands under the Designers at Debenhams label has proved a shrewd move that should continue to help the retailer to communicate strong differentiation in the long term as it strengthens its already sound credentials in fashion.
Moreover, the period saw investment in refurbishments of 12 stores and the high profile revamp of Debenhams’ Oxford Street flagship is due for completion in December; adding another 20,000 sq ft of retail space just in time for the anticipated Christmas rush. It has also identified 70 suitable sites for the expansion of its already considerable store portfolio.
While its ambitious store refurbishment and expansion plans continue apace, it is multichannel that has emerged as the real success story with online sales soaring by 46.2% over the last year. This represents growth far in excess of the rest of the market, though this should best be regarded as a valiant attempt by Debenhams to catch up with rivals. Indeed, online transactions now represent 26% of total sales at John Lewis compared to just 13.2% of Debenhams’ total sales.
On the international front, Debenhams has had a busy year, opening stores in the Philippines, Iran, Pakistan, India and Russia together with website launches in a number of markets. There are ambitious plans to open a further 150 franchised international stores within the next five years. Although inevitably much of the focus will be on the BRIC countries with their burgeoning middle class economies, Debenhams cannot be accused of reticence over less well-established paths: stores were opened in Armenia and Georgia in 2010 and 2012 respectively, while it counts Libya as one of its destinations for planned store openings.
With profit margins at home remaining squeezed, Debenhams’ bold moves to diversify its revenue streams into new markets should help provide a degree of insulation should it encounter any more hiccups in the UK economy. Indeed Debenhams’ international operation outperformed the UK over the last year with gross transaction value up 3.7% compared to 2.3% at home.
Investments in stores, improvements in multichannel and a focus on international growth and building on the success of its well-established clothing sub-brands should help Debenhams lay the foundations for long term success. With these foundations in place, Debenhams should emerge less susceptible to the vagaries of the seasons and its fortunes will be less reliant on discounts and promotions.
David Alexander is a consultant at Conlumino