When the private equity whizz-kids at CVC, TPG and Merrill Lynch floated Debenhams 11 years ago, they left it an unwanted present.
Before flipping it back onto the market, they cashed in the department store chain’s prized freeholds, signing it up to leases spanning decades. Today that legacy hangs heavily around the chain’s neck: its 175 stores in Britain and Ireland have an average lease length of 20 years.
That’s a lifetime in retail. The high street is already a shadow of its pre-recession self, under siege from online retailers and evolving shopping habits. A new chill wind blows through it as consumers brace for a Brexit slump. Like-for-like sales were down 2.4% in Debenhams’ latest quarter.
Its long leases give the chain few options as conditions deteriorate. It is considering closing 10 stores over the next five years, but that will barely make a dent in its fixed costs.
Then there is its poor use of space. Department stores are typically lumbered with barren space that makes little money. This is partly thanks to their layout: the further shoppers have to stray from the entrance, the less inclined they are to buy something.
However, Tony Shiret, veteran retail analyst at Whitman Howard, reckons Debenhams fares worse than most. He estimates its sales density is about £175 per sq ft per year, on which it makes about £7 of profit. That compares with sales density of about £295 at Next shops and £500 at Marks & Spencer (where food sales help). Add its tired array of own-brand clothing by designers of yesteryear such as Jeff Banks and John Rocha, and it is hardly inspiring.
The market scents blood. Short-sellers have piled into the stock, with a disclosed 12.5% of its shares on loan. So far their bet has paid off, with the shares falling 25% this year to 42.8p, valuing the chain at £525m.
Debenhams’ top team — new chief executive Sergio Bucher and chairman Sir Ian Cheshire — have a plan. As shopping gets more “experiential”, they reckon filling space with nail bars and the likes of the pizza chain Franco Manca will help make Debenhams the “nationwide destination for shopping events”. Mike Ashley clearly sees something in it, with his Sports Direct chain buying up 17% of the retailer. If anyone can squeeze more profit from a square foot, it’s the tracksuit tycoon. Still, I’m not sure it’s enough to turn around this high street bastion. Avoid.
