Debenhams' fate hangs by a thread as High Street braces for more closures
As the future of the ailing department store hinges on a potential buyer, Alastair Barlow looks at how Debenhams fell into administration and put thousands of jobs at risk.
It can be pretty confusing to understand what is really going on with high-street companies. Even before Covid-19 times, there seemed to be continual news of high street giants shedding jobs or closing down. In recent months, we’ve seen even more of a flurry of high street redundancies, closures, CVAs and administrations. Unfortunately, Debenhams is just another on a long list, that’s getting longer.
Writing about these traditional retailers is like a trip down memory lane for me. I’ve previously mentioned being dragged around Marks and Spencer as a child, and Debenhams was no different – it’s possibly scarred me as I can’t remember the last time I was in a Debenhams, other than walking through to get from a car park to the shopping mall. For the digital natives that don’t spend time on the high street, Debenhams is (was) another iconic British multinational retailer department store. Iconic because it’s been around for years. Literally hundreds of them!
In fact, it’s history dates back to 1778 when William Clark began trading in London. It later became Debenhams when William Debenham became a partner and changed the name to Clark & Debenham in 1813. Just over 100 years ago it was incorporated as Debenhams Limited in 1905 and first listed on the London Stock Exchange in 1928.
Roll forward almost 100 years to April 2019 and Debenhams shares fell from nearly 100p in 2015 to just over a penny in 2019 when its stock exchange listing was cancelled after it fell into administration.
However, this was to be the first of a series of ‘insolvency actions’ for the retailer. After the plc went into administration and a pre-pack sale (effectively eliminating Mike Ashley’s £150m shareholding), Debenhams Retail Limited went through a CVA led by KMPG which finished earlier this year. Subsequently, in April the directors appointed FRP Advisory as administrators.
Debenhams is larger than most people probably realise; prior to Covid-19, they operated 142 leasehold stores in the UK, online through the Debenhams website selling to over 90 countries, stores in Republic of Ireland, Hong Kong, traded in Denmark under ‘Magasin du Nord’ and had franchise agreements with third parties primarily in the Middle East. Overall, they sold through more than 240 department stores. They had just over 25,000 employees in 2018 and in their most recent financials, International accounted for 20% of their revenues.
Here’s a simple timeline before we get into the how and why…
- In 2018, the company announced the largest loss in its history, a pre-tax loss of £492m (thanks to a whopping £500m impairment charge).
- 9 April 2019 – Debenhams plc share price fell to an all-time low, the company appointed administrators and its stock exchange listing was cancelled.
- The trading entities of Debenhams (largely Debenhams Retail Limited) continued trading.
- 26 April 2019 – Debenhams entered into a CVA to rationalise the lease portfolio and other liabilities to allow the business the flexibility to implement its turnaround strategy with a store estate that reflected the current UK environment.
- The CVA was challenged by Combined Property Control Group (CPC), who owned six properties let by Debenhams after CPC alleged it was treated unfairly as a creditor. It was later rejected in the High Court.
- In August 2020, the company announced that will cut additional 2,500 job positions as a result of the economic effects caused by the pandemic.
A story of agility, or lack thereof
Despite falling footfall, Debenhams has done a pretty good job of maintaining revenues over the past decade. It’s hard to see the split of physical vs online retail in their numbers but overall as their physical retail sales have fallen, online retail sales have risen. Of course, this is to be expected but it’s a testament to Debenhams investment in online that they’ve been able to maintain relative top-line status quo given the increased competition in a near-infinite online market.
Debenhams revenue has held relatively static
However, it’s what happened in the layers below revenue that’s important; both the lines below it in the P&L and what makes up revenue. And this is where Debenhams has struggled.
I’ve mentioned the administration, the CVA and the second administration but what ignited these? Well, the 2018 plc accounts shout out the ‘exceptional’ indicator; impairment. You can see from the chart below that while operating profit was declining over time, it was 2018 where it took the nose-dive after the £500m impairment hit.
The impairment effect: Debenhams operating profit/(loss) fell off a cliff in 2018
Source: Debenhams plc Annual Report and Accounts 2018
You can see the impact from the impairment charge on the below pre and post exceptional items. Besides the £500m impairment charge there is also £25m of strategic review, restructuring and warehousing restructuring costs to transform the business in line with their Debenhams Redesigned strategy and redundancies.
Impairment charge effect: Pre and post exceptional items
Source: Debenhams plc Annual Report and Accounts 2018
The driver for the impairments came about as a result of the 2018 store performance and reflections on revised future projections, stores at risk of becoming unprofitable over time, and other stores where anticipated future performance would not support the carrying value of assets. In addition, management assessed goodwill. Given the pace of change in retail and their view of future growth rates, previous estimates of future economic benefit were revised and reduced. The combined effects of lower footfall, shift in online consumer spending and rates costs meant an increase in underperforming stores which no longer generated sufficient revenues to cover their carrying value and thus the impairment review and asset write-downs.
2018 impairment charge:
|Store impairment and onerous leases||118|
|IT systems write-off||80|
To add insult to injury, wiping out nearly 50% of their balance sheet didn’t come without repercussions. In addition to the challenging trading conditions, Debenhams poor credit rating took a hit too. Credit availability declined which impacted working capital by reduced payment terms, cash deposits and retention amounts which in turn impacted cash availability within the business and lead to lower investment in growth. A vicious spiral. Equally, they had a fair amount of debt on the balance sheet at £364m which had previously been refinanced and was coming up for maturity.
And of course, when a plc goes into administration and the administrators don’t think shareholders will get anything back, the already tanking share price is removed from the stock exchange.
Debenhams 3-year share price leading up to administration in April 2019
After the administration came the CVA. As part of the CVA, Debenhams developed another business and restructuring plan to rationalise its UK operations and to further invest in the online market. Although a number of stores were closed, and more scheduled, Debenhams still continued to suffer from high rent and rates, which combined decreased footfall meant that costs were still unable to be reduced to a sustainable level.
And for a second time in two years, they were put into administration. The more recent obvious impact has been driven by Covid-19 when all non-essential retail stores had to close. Trading online-only, left 142 UK stores with no revenues.
So, currently in administration, and unable to come to an arrangement with a number of landlords, Debenhams is exploring options; the current owners retaining the business, potential new joint venture arrangements (with existing and potential new investors) or a sale to a third party.
Meanwhile, there is huge uncertainty for employees and landlords with a threat of more store closures and another 2,500 jobs at risk, on top of the 4,000 announced in April.
Debenhams isn’t alone. House of Fraser, owned by Mike Ashley’s Frasers Group, are also making noise about potential closures. Again, online sales are holding up strong but it’s the perennial physical retail challenge; lower footfall and expected rates hike that’s the problem exacerbated considerably of course, by lockdown.
At the end of the day, it’s an easy equation: revenue, cost of sales and operating expenses. But with hugely complex variables: footfall, digital, lease commitments, tastes, preferences and so on. As consumer trends have evolved Debenhams has tried to keep pace as an omnichannel destination which they’ve done reasonably well with digital, but their estate has left them strangled.
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Alastair is founder and Chief Dreamer at flinder. flinder provides accounting, consulting and rich real-time management information for growing businesses. As well as his work with fast-growth businesses and transforming finance functions, he writes for AccountingWeb in a monthly column, sits on the ACCA Practitioner's Panel Network and was...