Stripped to the essentials

Debenhams has become a classic private equity victim and its recovery could be slow, but if it focuses less on cash flow, invests in its stores and sparks interest with some ‘must-have’ products – in the style of M&S H&M and Topshop – it could turn things around. Matthew Gorman reports

Debenhams is hoping actress Jane Seymour will do for its brand what Twiggy did for rival M&S and inject some sparkle into its less than dazzling recent performance.

Last week, Debenhams launched a TV campaign featuring former Bond girl Seymour, just a day after issuing its third profit warning since December, following a 4.5% drop in sales for the 26 weeks to March 3.

Richard Ratner, vice-chairman and retail analyst at investment bank Seymour Pierce, believes Debenhams has under-invested in its stores, but he thinks its biggest problem has been its “megadays” sales. “It has trashed the brand by selling something for £50 one week and then £30 the next,” adds Ratner. “It should have been doing better because it is the biggest of the department stores in young fashion and that has been a strong market.” Ratner points out that Debenhams now discounts stock for 16 weeks a year through its Blue Cross sales and other promotions.

The M&S factor
A resurgent Marks & Spencer has also had a significant effect on Debenhams, according to Mike Godliman, director and senior retail consultant at Pragma Consulting. “I don’t think it is in as bad a way as many people say – it’s just that the competition has got better,” he says. “A lot of it is down to economics and M&S having a huge share of that sector. In terms of retail space, it dwarfs Debenhams and, when it is doing well, it is better simply because it has so much space. House of Fraser is also improving, but as it has, it has pushed Debenhams down the pecking order.”

But it has not always been this way for Debenhams. The company was in rude health before being acquired by Texas Pacific Group and CVC Capital Partners for £1.7bn in 2003. Merrill Lynch Global later joined the consortium of private equity firms before the consortium refloated Debenhams on the London Stock Exchange in May last year.

Mintel director of retail research Richard Perks thinks Debenhams’ fate is a classic example of what happens when private equity firms take over retailers, and adds that he is “delighted” Sainsbury’s has avoided a similar fate. “It’s obviously been aggressively asset stripped,” he says. Property has been sold off and it is being run for cash. I think it will take Debenhams a while to get back together again. It was a great business before that.” Ratner believes the experience of Debenhams will make people wary of private equity firms in the future, but says/ “I don’t think Debenhams is finished – it just needs to spend money on the stores.”

Expanding into the unknown
The retailer has ambitious plans to turn things around. Despite a fall in like-for-like sales, pre-tax profits were up 34.4% to £105.5m over the 26-week period to March 3. The company has 132 department stores, has acquired a further 29 and plans to expand into larger retail destinations, such as Liverpool, Bath and Newcastle, where it has no presence.

It has 32 international stores, including new outlets in Germany and Russia, and is planning a further 20 stores overseas. It is also refurbishing 60 stores in the next 18 months and will increase the number of Desire stores from seven to 12. The stand-alone high street womenswear stores sell predominately the Designers by Debenhams and other exclusive own-brands in outlets of up to 18,000 square feet. Chief executive Rob Templeman says the format has the potential to total 100 stores in high street and retail park locations, but is a concept Godliman says he is not convinced by.

“I’m sceptical of Debenhams’ smaller stores, just because there are so many women’s fashion stores on the high street,” he adds. “Department stores are unique and offer a unique experience. Fashion stores are just the same. I thought it would have gone for more department stores on out-of-town sites.”

Perks believes the company is well placed in the middle market and should not consider repositioning like House of Fraser, which recently announced plans to target higher-end spenders. “To recover, it needs to spend money and concentrate on more than just cash flow,” he says. “It takes a long time to turn any business around and it should spend money on its stores.”

Sparking interes
Godliman says Debenhams needs to get people talking about the brand again. “It needs something that is going to create interest in Debenhams,” he adds. “Just having another designer isn’t going to do it. It needs people to say ‘you must go to Debenhams and buy a specific item’. Its got to get a ‘must-have’ product that will put Debenhams up the consumer list. People are not talking about ‘must-have’ items at Debenhams like they are for M&S, H&M and Topshop.”

Keeping ahead of the line
The department store market is fiercely competitive. House of Fraser and John Lewis are expanding along with the iconic high-end London stores Harvey Nichols and Selfridges – which have both opened stores around the country in recent years – creating a higher premium on an increasingly limited number of suitable retail sites.

Debenhams has spent the past 18 months concentrating on a number of acquisitions, such as the chain of nine Roches stores in Ireland and several Allders stores in the UK, and the retailer is now moving onto a period of store refits that is again likely to hit sales. Yet Perks believes that if the retailer can muster some “TLC and money”, then “there is no reason why Debenhams can’t fight back”.

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