Debenhams profit drop but growth potential is huge, international is key

Under-pressure department stores operator Debenhams issued its full-year results on Thursday morning and what we got was mix of bad news (plunging profits) and good (plenty of new ideas and some early encouraging signs). 


Debenhams


And while the financial community is likely to focus on the former, it’s the transformation programme under CEO Sergio Bucher that will see it standing or falling in future. On that front, it certainly has a lot going on.

An upcoming new designer collaboration, the launch of in-store gyms, more Blow on-demand beauty areas, a ramping up of its digital activities with a new mobile app already sending conversion rates soaring, and the end of its Ben de Lisi for Principles offer, are just some of the changes. And there will be two store closures, plus a determination to make Magasin du Nord a hub for Scandi brands.

THE NUMBERS

First, let’s take a quick look at the figure. In the 52 weeks to September 2, group gross transaction value (GTV) rose 2% to £2.954 billion and comp sales rose 2.1%. But profit on an ebitda basis was down 7% to £217 million, underlying pre-tax profit plunged 16.6% to £95.2 million, and report pre-tax profit dropped even further, by 44.2%, to £59 million. Ouch.

While beauty sales grew by 5% and food by 8%, clothing declined by 0.5%, “broadly in line with the UK market.” As it continued to add concessions and moved further into non-clothing categories, its own-bought mix fell from 76.6% last year to 75.3%, with a dilution to the gross margin rate, offset by benefits from reduced markdowns. The group gross margin rate declined 30 bps, in line with guidance, but full-price sales grew 1.7%.

UK ebitda declined 10.1% against a tougher trading background in H2 but was helped by tight cost management. International ebitda grew by 8%, with Magasin du Nord in Denmark having a solid year in a tougher trading environment, and the Irish business benefitted from restructuring under examinership.


Debenhams


A major bright spot was that digital sales grew 12.7%, driven by mobile orders up 57% in the UK, with mobile now accounting for 55% of digital orders.

CEO Sergio Bucher said: “The environment remains uncertain and we face tough comparatives over the key Christmas weeks. However, we are well prepared for peak trading and the early signs from our activity to date confirm that we are moving in the right direction towards a successful and profitable future."

THE FUTURE

So let’s look at what Debenhams is doing to turn itself around and carve out that profitable future. And its certainly busy with major change to its mobile app, two stores set to close soon, and that new initiative to open in-store gyms just a snapshot of its plans.

Its recent investment in beauty bars firm Blow Ltd showed that it’s prepared to move into new areas. It will open three beauty bars in flagship locations including Oxford Street before Christmas, with a further four to open in the New Year and it aims to have national coverage in key centres within three years.

Its move into new areas was also brought into further focus Thursday as it said it would partner with Sweat! to trial gyms, initially in three stores. It said this will help it understand the opportunity “for a proposition in the growth market of health and wellbeing.”

It also said there will be more strategic partnerships to come “as we identify opportunities to create compelling destination categories; drive customer frequency; and build leadership in the category we define as Social Shopping.”

One key development has been that this month its upgraded its mobile website and this has already delivered “a step-change in its mobile site, significantly improving speed and responsiveness.” And in the first three weeks since launching, conversion rates have shown a double-digit percentage point improvement.

But while digital is key, stores are also important. and like John Lewis with its just-opened Westgate, Oxford, store, the company has established "test labs" for new format trials in its new Stevenage and Wolverhampton locations. These are delivering “very positive initial results.” The Stevenage store opened two months ago and is performing well ahead of plan in the early weeks of trading. Debenhams said “we will review progress over peak and apply the lessons learnt in more locations in the spring.”

And it confirmed its exit from a number of activities. As planned, it has closed 10 regional warehouses, has exited four franchise markets, and is announcing the closure of two stores (Eltham and Farnborough) in January 2018.   

PERFORMANCE IMPROVEMENTS

The sales figures for the last year show that tweaking its product focus is the right thing to do. Debenhams has seen good growth in its strategic destination areas of Beauty, Accessories and Food. This has helped to mitigate the impact of a weaker clothing market. And its focus on reducing stock density and improving brand presentation has supported a 1.7% improvement in full price sell-through.

It relaunched its Beauty Club loyalty programme, with additional benefits, and with celebrity Alesha Dixon as the face of "Let's talk Beauty", to build on its base of 1.2 million cardholders, with a resultant increase in the base of over 10%.
And as it aims to become a primary destination in the important accessories categories of lingerie and footwear, it has trialled a new merchandising presentation, combined with a reduction in options and a stronger service proposition in its Test Lab stores with positive early results.

But what about clothing more generally, that area that declined slightly in the last year? The company intends to take” a more robust approach to managing our existing brands, refreshing them more frequently.” It said Principles is a brand “with a great future that we plan to reinvigorate, and to that end we are confirming today that this will be the last collection by Ben de Lisi for Principles.”


Debenhams


It launched a new Designer range, Studio by Preen in Spring 2017. The demand for this range “has confirmed the appetite for a more fashion-forward offer from its customers, and in 2018 we expect to launch a new Designer brand with “up-and-coming talent.”

And the company is currently recruiting for a new Fashion and Home chief role with that person set to become a member of its executive committee.

INTERNATIONAL

But with all this focus on its UK business, let’s not forget that the firm is also expanding abroad. Despite exiting some markets it has just opened in Australia and its total international business accounts for around 20% of group GTV and ebitda profit. 

The largest contributor to International turnover and profit is its department store business in Denmark, Magasin du Nord. It  also operates 11 Debenhams stores in Ireland and has 63 franchise stores mainly in the Middle East and South East Asia. It’s also growing digital operations across its core markets and is expanding its digital presence into new countries through selected partnerships and brands.

Magasin had a “resilient year against a weaker market background” continuing three years of good sales and profit improvement. The performance reflected investment in the Copenhagen flagship, including extensive upgrading of the beauty hall, and launching 100 new brands, which has helped support further strong digital growth of around 40%.  
Its core Middle Eastern markets had a tough year given the geo-political climate but remain an important part of its future strategy.

And it has built partnerships with third party digital partners for a number of its brands, in order to reach different demographics and geographies. It has a brand presence on Asos, Label, Very, Zalando and Zalora, and launched on Amazon Prime in the UK and Amazon.de during the year.

At Magasin du Nord it has identified a “significant” digital opportunity to grow beyond its domestic market and is continuing to add brands to expand the digital offer with the aim of making Magasin “the destination for Scandinavian brands.” As well as opening a new Danish store at Aalborg, it plans new digital market entries in the Nordic region in 2018.

And having just opened its first Australian store in its deal with Pepkor, it will open a store in Kuwait in the spring. Both openings will apply some of the lessons from its UK "test labs” and it plans to test mobile-led digital propositions in both regions.

And it will use marketplaces to test brand opportunity and scale in new markets. It’s continuing to develop a "brand franchise" concept, whereby its brands are sold within a host retailer in markets that might not support a full range Debenhams, or to prepare the way for full market entry, as in Australia.

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