Debenhams’ decision to close up to 50 stores, cut costs by an additional £30m and reduce its capital expenditure by more than half will set the business up for future success, chief financial officer Rachel Osborne has told Drapers.
The struggling department store group announced a £491.5m statutory pre-tax loss for the year to 1 September 2018 – down from a £59m profit the previous year. EBITDA fell by 27.5% to £157.3m. Underlying profit before tax more than halved, dropping 65.1% to £33.2m.
Profits took a hit as a result of a £12.3m investment in the Debenhams Redesigned strategy, and £512.4m of exceptional write-downs relating to “impairment of historic goodwill relating to the private equity transaction in 2003, store impairment and IT systems”.
Like-for-like sales were down by 2.3%, and Debenhams described beauty and fashion as “weak” areas. Gross transaction value for the year also fell, by 1.8% to £2.9bn.
Osborne said the retailer was making difficult decisions that would ultimately future-proof the business: “We want fewer, better stores and a bigger and better online offer. We have made these write-offs so we have a strong platform going forward. We have made decisive action to move forward.”
Debenhams has identified up to 50 shops for which it can “no longer see a long-term future”. The locations of the stores that are most likely to become unprofitable have not been revealed, but they will close in the next three to five years. A further 20 stores, which are likely to remain profitable, are unlikely to “to deliver a return on further investment” in the current market, so the business said it was seeking “alternative solutions” for these shops.
The remaining 100 stores have “clear growth opportunity”, said Osborne.
Of the 50 stores earmarked for closure, only 12 have leases up for renewal in the next five years. Osborne said the retailer would negotiate with landlords over the remaining 38: “We need a vibrant high street. We need to start negotiating with landlords about what is the right outcome for those stores. Do they need to be repurposed? Do they need to be reduced in size? Does the rent need to be reduced? Does the landlord need to invest in the store?”
She added: “For example, the council in the town of one of the stores decided to invest in the whole town centre. They made a huge contribution and that changed our perspective on that store, as the area will be more vibrant in the future.”
Debenhams said it would make additional cost savings of at least £30m in the next year, and total savings would amount to £50m by 2020.
Key elements of these measures include: further reviews of support centre overheads and central costs, additional warehouse consolidation and automation, and an end-to-end structural review of the business, including the efficiency of its supply chain.
Osborne would not be drawn on how many redundancies were likely to happen as a result of the changes, but said: “Every retailer is tightening their belt. Over the last 12 months, we’ve restructured, and removed a management layer from stores and several layers from head office teams.
“Simplifying the business has resulted in savings. For example, as we have a simpler structure, we don’t need to invest in a bespoke IT system – we can get it off the shelf, so that lowers the overall IT costs. On the support centre, we will look at all costs – not just payroll, but also the location in central London.
“We are also looking at the entire supply chain – we’re taking a step back and looking at our end-to-end stock flow, and we’re going to make our warehouse automated.”
Planned capital expenditure in the business will be reduced to £70m, down from a predicted £150m.
Osborne said Debenhams would look at inexpensive ways to improve its store estate, and will roll out elements from the most recently refurbished stores to a further 13 flagships (Read about the new Debenhams at Intu Watford, which opened four weeks ago.)
“We are looking at low-cost ways to refresh our stores – such as better merchandising,so the stores look better, but [without a] big cost,” she explained.
In terms of product, Debenhams described its fashion performance this year as “weak”, but stressed it had held market share. Osborne said the chain was improving the quality and fashionability of its product, which it had “let drift”. She added that ranges have been improved for spring 19.
Group gross margin dropped 140 basis points in the year as a result of “competitive discounting”.
“We want better products that sell at full price,” said Osborne. “We want the focus to be on newness rather than discounting, but our competitors went on Sale early and very deep, and we need to remain competitive.”