A THIRD of Debenhams stores at risk of closure
Struggling retailer targets 50 outlets in bombshell bid to save £100m
STRUGGLING department store Debenhams is preparing a radical overhaul of its 200-year-old business that will include reviewing its store portfolio and slashing its dividend to zero.
The company, which announces annual results on Thursday, is understood t o have i dentified around a third of its 166 stores to face possible closure. It is also understood to be preparing a significant write-down of its goodwill – the way companies account for their inherent value – that would result in a one-off charge of several hundred millions of pounds.
The ailing department store, which has posted a string of profit warnings this year, is seeking to generate around £ 100 million in savings. Scrapping the dividend will save the retailer around £ 30 million. Managers are also weighing proposals to save £70 million by reducing capital expenditure.
The extent of Debenhams’ store closures will depend on negotiations with landlords. It is thought executives believe the chain could shrink to around 100 outlets over the coming years.
The restructuring, set to be outlined alongside Debenhams’ results, follows the arrival of Rachel Osborne as finance director last month. She is likely to emphasise that any write- down relates to non-cash items only and is not a reflection of recent overall performance. Debenhams is battling with expensive leases signed by previous management in more buoyant retail times.
One City analyst, who asked not to be named, said: ‘You can’t just walk away from 50 stores. You still have to pay the rent or pay off the leases. Can they afford to do that? Is there a rescue rights issue coming? Or, down the line, a rights issues combined with a CVA?’ he said, referring to the mechanism that retailers increasingly use to shed stores.
‘You have to pay up to scrap leases or get the landlord to let you off the hook – neither of which is easy,’ he said. In an letter written last week to property industry magazine Estates Gazette, Debenhams chief executive Sergio Bucher said: ‘After our people, property is our biggest cost. And, right now, it is our biggest challenge.
‘While almost all of our 166 UK stores are profitable today, extrap- olate current market trends three to five years forward and that picture is going to change.’
City sources said the retailer is also looking to clean up its balance sheet after suggestions from associates of Mike Ashley, the boss of Sports Direct. The sporting retailer owns 29 per cent of Debenhams.
Ashley’s team reportedly raised concerns several months ago about the £820 million of ‘goodwill’ which is accounted for on Debenhams’ balance sheet, but which is now expected to be significantly reduced. That could take it into the red on an accounting basis.
Osborne is expected to spearhead the restructuring efforts while Bucher leads Debenhams’ transformation into a smaller, but more sustainable business.
Analysts at Peel Hunt forecast Debenhams will cut its dividend as its management looks to prioritise capital expenditure over shareholder distributions. Debenhams has already announced a raft of job cuts, announcing in August that it had put around 200 colleagues in its head office under consultation. Any future store closures could put more jobs at risk.
The retailer said last month that full-year profit – excluding one-off items and accounting charges – would be around £35 million, down from £95.2 million the previous year.
Pressure on Debenhams has been exacerbated by the collapse of rival House of Fraser this summer. It was bought in a pre-pack administration by Ashley, who has since tried to negotiate a huge cut in rents.
High street stalwarts including Homebase, Mothercare, New Look and Carpetright have all pursued store closure programmes, using an insolvency procedure known as a Company Voluntary Arrangement, shedding thousands of jobs.
Debenhams declined to comment.