Debenhams talks to lenders after sales fall in tough Christmas season
today Jan 10, 2019
There’s rarely good news surrounding UK department store Debenhams these days, and its Christmas trading update on Thursday certainly didn't deliver much, although there were some crumbs of comfort in a bleak report.
That report also came with news that the company is talking to its lenders and resulted in another share price fall. A firm whose shares once changed hands for above £2 each, now has shares costing just a little over 5p each.
The company said Thursday that for the six weeks and 18 weeks to January 5, its sales fell again, “against a challenging market backdrop”. But at least the group is “currently on track to deliver current year profits in line with market expectations,” although this will only be achieved partly with the support of “further identified cost savings”.
So what happened over the Christmas trading period? The retailer said that group gross transaction value (GTV) for the six weeks declined 3.8% and like-for-like sales were down 3.4%. The UK fell by 3.6%, “with weak store footfall offset by growth in digital.”
But at least those figures weren’t as bad as those for the longer 18-week period. In the 18 weeks, GTV dropped by as much as 5.6%, with LFL down 5.7%. The UK was down 6.2% with International dropping a less bad 3.5%. Digital sales grew in the period, but only by 4.6%, which looks fairly anaemic compared to the growth rates turned in by some other retail giants.
Debenhams said that the UK trading environment “has continued to be volatile, as expected, with clear evidence that our customers have been seeking out promotions.” As a result it “reinstated some tactical promotional activity in order to be competitive and manage inventory tightly, which will result in some gross margin erosion in the first half.”
That's not the kind of news that analysts and investors want to hear, although if it had resulted in a sales increase, that could have partly justified its markdown strategy. As it was, the company appears to have dented its profits by discounting but still hasn't gone anywhere near to achieving sales growth.
It also said that it continues to generate cash, with net debt as at January 5 of £286m, and “in light of the requirement to refinance existing bank facilities within the next 12 months, constructive discussions have commenced with lenders, and the group has put on hold any further asset disposals until the outcome of those discussions is known. This process includes options to bring new sources of funding into the business to ensure the appropriate capital structure.”
So was there any hint of good news in the update? Well, although online sales rose only 4.6% in the 18 weeks, the retailer said that “after a slow start to the season, group digital sales rose 6% in the six-week period over peak against a strong comparative performance, delivering two-year growth of over 20%. This was supported by improved mobile conversion and customer experience.”
And it added that its new beauty strategy “drove more choice, and digital innovation supported growth in market share in skincare to mitigate [the] decline in [the] premium make-up market.”
We also learned that “revitalised product has driven improved market share in womenswear and [the] differentiated gift offer delivered an improved margin performance over peak.”
Also good news, on the store front, its nine locations that are trading in its new design format “have outperformed the core chain, with the strongest LFL uplift being seen at Stevenage,” which is the flagship location for its new design.
So what was the view from the top? Chief Executive Sergio Bucher, who has one of the most unenviable jobs in UK retail but will be something of a hero if he manages to turn Debenhams around, said: “We have worked hard to deliver the best possible outcome in very uncertain times for retailers. We responded to a significant increase in promotional activity in the market, particularly in key seasonal categories, in order to remain competitive for our customers.
“We have taken decisive steps to maintain rigorous cost and capital discipline. In order to ensure that Debenhams has a sustainable and profitable future we need a strong customer proposition, a strengthened balance sheet and a reshaped store portfolio. We have a robust plan to deliver this and while there is much work still to do, the performance of our Redesigned stores over peak, and continued outperformance in digital, reinforce our view that we are taking the right steps to protect the future of the business.”
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