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Department stores face fight for survival

The UK department store sector remained in turmoil this week, as question marks hung over the future of anchor stores in many shopping centres and high streets.

Debenhams has brought in advisers from KPMG to explore restructuring options, which could include a company voluntary arrangement (CVA), as it battles falling profits.

John Lewis was expected to unveil a dip in profits as Drapers went to press on Monday, while the future shape of House of Fraser’s store estate has yet to be determined, weeks after it was bought out of administration by Sports Direct.

“The department store sector is very challenging at the moment,” one supplier told Drapers. “We are seeing a decline across the board and it wouldn’t surprise me if Debenhams goes through a CVA.

“Both Debenhams and HoF have been caught in a cycle of discounting and they are struggling to compete. John Lewis – although expecting a drop in profits – has a strategy to defend its position and is investing heavily. Others have failed to do that.”

One logistics source said: “The state of affairs shows that none of these department stores are immune to what’s going on out there. Perhaps the model is broken or needs a serious rethink at least.”

One supplier to Debenhams agreed: “The department store sector has lost some of its relevance to younger customers, so it is no surprise that Debenhams is working with KPMG and is looking at its options. All retailers are doing that at the minute.”

He added: “We still have insurance cover in place for Debenhams, although providers are looking to pull back [on cover]. But as long as there is insurance, brands will continue to support it.”

The source urged the department store to communicate its plans quickly to its supply base to offer some clarity.

Drapers understands Debenhams is examining other options, including renegotiating leases on the 25 stores that are up for renewal over the next five years, and is working with landlords to reduce the size of up to 30 shops.

A spokeswoman said: “Like all companies, Debenhams frequently works with different advisers on various projects in the normal course of business.”

The retailer defended its position this week, issuing a statement saying pre-exceptional, pre-tax profit for the 12 months to 1 September 2018 will be around £33m, within the current market range of £31m to £36.5m, and EBITDA will be around £157m.

Meanwhile, at House of Fraser, suppliers told Drapers the picture was looking slightly more positive than recent weeks, as Sports Direct owner Mike Ashley sought to get the business back on track.

Ashley is understood to be pursuing at least short-term deals on 80% of the HoF store portfolio and the XPO Logistics distribution centres had reopened, and deliveries were being collected and distributed to stores. However, the website was still offline.

Drapers understands Ashley is offering some suppliers 30-day payment terms, instead of the extended payment terms – up to 120 days – offered by HoF previously.

One concession partner told Drapers several issues were still to be resolved but Sports Direct is working to resolve them: “They have made some progress already with changes to payment terms and removing some conditions to make concession trading easier than it was before.”

He added: “They have big ambitions for House of Fraser and, as far as we’re concerned, what has happened has happened. Those that want to stick with HoF need to move forward and rally behind them to make it a success.”

Another supplier said: “Sense is prevailing. It is early days and I’m not convinced anyone is jumping for joy that everything is done and dusted, but the warehouse is back open, and the website is due to be back online this week.”

Another supplier said he believed HoF was looking at different options and may shift its focus from a concession model towards wholesale.

“They will be looking at where they make the most money. If you have cash, wholesale is better than concessions, so they might want to move to more of a wholesale model.

“Payment terms changing mean companies won’t build up the same level of debt [as under the previous House of Fraser management]. Obviously for concession brands that have lost three months of sales this could still prove impossible to recover from.”

Drapers has contacted Sports Direct for comment. 

 

Readers' comments (3)

  • It is worth noting the Independent Department Store sector, where freehold ownership, and greater agility enables them to keep in tune with their local customer base.

    For example, Elys in Wimbledon (the 90,000sqft flagship of Morleys Stores Group) is currently under-going a £3m redevelopment, transforming both Ground & First floors.

    They are investing in ENVIRONMENT, BRANDS & PEOPLE, with real success, and follows previous projects in Wimbledon, Newbury (Camp Hopson) and Enfield (Pearsons).

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  • Im guessing there will be something about a Debenhams and HoF merger tomorrow.

    Not that it’s going to happen, but might happen in the near future.

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  • darren hoggett

    Department stores have decision to make regarding the younger end of the market as there is a split within the demographic of shoppers in stores and shoppers online.

    Are the kids worth chasing? They have less - to considerably less - disposable to spend and what they do have is mainly spent online. If you don't chase them, they'll be gone for good. If you do, then will it be cost effective?

    It doesn't become a dilemma for Indies like ourselves, though it should not be ignored. The flexibility of the Independent wins out. However, the typical 20 year isn't going to spend a £1,000 a time like someone in his 50's, so you have to get the proportion right in your buying and focus accordingly.

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