Debenhams PLC (LON:DEB) reported the largest loss in its 240-year history and said it would close up to 50 underperforming stores over the next five years as part of its plans to revive the ailing business, sending its shares soaring.
As part of its turnaround plan, the embattled department stores group on Thursday said it would focus future investment on its ‘Debenhams Redesigned’ modernisation scheme at up to 100 stores and develop a new lower-cost approach for 20 outlets.
Debenhams currently has 165 stores and employs some 27,000 staff, meaning its store closure plan could put up to 5,000 jobs at risk.
The retailer, which has issued four profit warnings this year, booked exceptional charges of £512.4mln, leading to a statutory loss of £491.5mln in the year to September 1, compared to a profit of £59mln a year ago.
It posted an expected 65.1% drop in underlying profit before tax to £33.2mln on sales up 1.8% at £2.9bn. It added that no final dividend would be paid as it focuses on cash generation and cutting its £321.3mln debt pile.
Like-for-like sales fell 2.3% during the period amid what the company called a volatile market backdrop in the second half of the year. However, Debenhams said that although its core fashion and beauty markets had been weak, it had maintained its market share.
Clicks beat bricks
The department store chain is one of many high street retailers that have struggled as more consumers switch to online shopping and hunt for discounts.
Debenhams said it had delivered above-market digital growth of 12% during the year. Digital growth accelerated to 16% in the second half as mobile demand grew 20%, supported by its new development programme.
"Clicks are beating bricks, and retailers are having to cut their cloth accordingly," senior Hargreaves Lansdown analyst Laith Khalaf said in a note to clients.
"Debenhams’ CEO Sergio Bucher was recruited from within the ranks of the Amazon executives, so we can expect some tech know-how to be leveraged here. The combination of a strong digital offering with a presence on the UK high street could be a winning combination for any retailer that gets it right, as the physical outlets provide a handy place for customers to collect and return items," added Khalaf.
During the year, Debenhams achieved annual cost savings of £20mln and said that additional annual cost reductions of £50mln would help it deliver cumulative cash savings of £130mln by 2020. It also said that it would continue to evaluate its options for the possible sale of non-core assets.
“We are taking decisive steps to strengthen Debenhams in a market that remains volatile and challenging,” CEO Sergio Bucher said in a statement.
“Working with our new CFO Rachel Osborne, and the board, I am determined to maintain rigorous cost and capital discipline and to prioritise investment to achieve profitable growth. At the same time, we are taking tough decisions on stores where financial performance is likely to deteriorate over time.”
Analysts at RBC Capital said Debenhams' "aggressive store estate rationalisation plan" would likely be well received by investors.
"For Debenhams to offer an attractive long-term equity story, we need to see some prospect of an improvement in underlying trading, and department store trading conditions remain very challenging," RBC said in a note to clients.
"We see an opportunity for it to improve its gifting offer this year but still feel its 'beauty' offer is much stronger than its clothing and homewares ranges, which have too much duplication and remain highly promotional," they added.
Consumers increasingly expect an ‘experience’ when they visit department stores today and Debenhams is using some of its space to capitalise on that trend, with gyms and food outlets being opened in department stores.
Shares in the retailer, which have shed two-thirds of their value since the turn of the year, were 15.15% up at 9.81p in early afternoon trade.
- Updates with further details, adds analyst comment and share price info -