Trouble in store
Debenhams faces a bumpy 2020
DEBENHAMS has had an annus horribilis. Once a fixture, the store chain is on life support after falling into the hands of its lenders. It hopes enough shoppers visited before Christmas to deliver a last-minute boost but after the festive season, it will shut 22 shops, with a further 28 of the 166 earmarked for closure, to cut costs. Some industry observers have warned the axe has to fall significantly deeper to make a difference.
Debenhams is running hard to stand still. Day-today costs are too high and it cannot afford to modernise stores, crucial for a turnaround. “There are some deep-rooted problems in terms of cost base, trading and the legacy of the private equity ownership,” says Tony Shiret, analyst at Whitman Howard. “The demand outlook [for its product] is the biggest issue they face.” Private equity firms CVC, Merrill Lynch and TPG took the chain private in a £1.7bn deal in 2003. They cut investment, began discounting, and sold and leased back stores, some of which are on contracts of almost two decades. It returned to market in 2006, but high fixed costs have weighed on it, with added pressure from online players such as Asos and Boohoo.
Debenhams went ahead in April with a company voluntary arrangement (CVA). The firm is said to have negotiated cheaper rents on about 100 stores. Last year the rent for its estate was £225m. Come January, it must foot a chunk of it. Another burden is its £200m tranche of bond debt. After covering costs, the chain must make enough money to pay interest until the cash to its bondholders is due in 2021. The bonds have been trading at 27p on the pound after a sharp fall, suggesting investors may not be as confident they will get their money back
It is also at the mercy of its lenders. When it went into administration after rejecting a takeover deal from Mike Ashley’s Sports Direct, it fell into the hands of its lenders in a debt-forequity swap. This gave Debenhams access to £200m from lenders such as Barclays and Bank of Ireland, as well as US hedge fund Silver Point and Goldentree.
Shortly after, consultants at Lazard tried to flog it to help shrink its debt and take on some pension liabilities, administrators at FTI Consulting said in a report, but “no such buyer was found”. Debenhams borrowed £50m more in September to see it through Christmas – it says that was repaid. It also has access to £320m of emergency cash.
Stefaan Vansteenkiste, Debenhams chief executive, says: “We are focused on implementing the company’s turnaround.”
Now the firm is no longer listed, there is little visibility of who calls the shots. In the pre-pack administration, FTI Consulting sold the shares to Celine Newco I Limited, owned by “the lenders”. The holding company is incorporated in Jersey. The firm lost £491.5m last year on sales of £2.2bn, mostly because of one-off charges, against profits of £59m in 2017. Last month Debenhams drafted in Mark Gifford, former finance chief of House of Fraser, as its new chairman.
Ashley – whose £150m stake was lost – has fired another salvo at David Adams, chairman of its audit committee. “[Adams] should take a huge responsibility for the incredibly optimistic and aggressive accounting, which allowed them to carry on paying dividends despite their balance sheet not being worth the paper it was printed on,” Ashley said.
Meanwhile, one landlord has rebelled against the CVA, hoping to overthrow a legal win. It said it was being treated unfairly as a creditor and has appealed the rescue, with a hearing expected next month.
Analysts such as Shiret think Debenhams’ days are numbered although there is value in assets such as profitable stores and its Danish chain Magasin du Nord. He warns: “I don’t see a long-term solution; you’re just loosening the financial constraints for a bit.”
Veteran analyst Richard Hyman agrees: “The outlook for Debenhams is bleak. If their owners are prepared to put several hundred million more in, it can carry on, but how long are they going to do that without any prospect of seeing returns? I don’t think they will survive 2020. You can’t keep doing that.”