Debenhams to close 50 stores, beauty weakens but it gains womenswear share

Debenhams reported its biggest-ever loss on Thursday and confirmed a plan to close 50 stores as well as saying the beauty market has dipped in recent months. But it’s remaining upbeat and thinks it’s on the right track.


Debenhams

The firm made a statutory annual loss of £491.5 million for the year to 1 September, a figure unprecedented in its long history. It had made a profit of £59 million a year ago. Not that this loss is because of weak trading. Most of that money is down to over £524 million of charges for goodwill and impairments, with the firm actually reporting underlying profits of £33.2 million, although this was sharply down from the year earlier’s £95.2 million. The figures came as group gross transaction value fell 1.8% to £2.9 billion and gross margins declined by 140 bps.

Like-for-like sales (LFL) declined 2.3% with constant currency LFL down 2.7% as the UK remained “volatile” in H2. But while the firm’s core markets of fashion and beauty were weak, it “held share” overall.

The news about the beauty under-performance is worrying as that’s key to the company’s transformation plan. But it said that “after some years of strong growth, the UK beauty market suffered a slowdown in FY2018, with a negative performance in make-up, our strongest category. Together with higher competitor discounting, this affected our overall performance in the financial year, with a decline in growth of 0.8% in the category.”

But it’s continuing to focus on its beauty strategy, rolling out more flexible ‘lab’ spaces and introducing new brands. It has successfully tested #beautyhub, a multi-brand format that allows smaller stores to offer a “greater variety of brands in a tighter footprint with shared staffing” and will roll this out further. 

It has also identified beauty market opportunities, including mini beauty items (for travel and gifting), premium haircare and male grooming. And it has launched the BeautyClub Community social media forum for beauty lovers - the first of its kind in the UK. The 1.3m members “are highly engaged with social media and the community will transform our relationship with customers and demonstrate digital leadership in the category.”

In fashion, the market may have been tough but it has maintained market share overall, and grown share in womenswear, “which is where we are most advanced with the product improvements.” It has begun the process of refreshing its portfolio of designers, phasing out some and introducing London Fashion Week award winner Richard Quinn. “With upgraded fabrics in Designers and product that is better differentiated and ‘true to brand’ we have seen faster sell-through despite the wider discount-driven environment,” it said.

Also good news, digital growth accelerated in H2 to 16%, continuing to outpace the overall market. Mobile demand grew around 20%, “supported by our agile development programme driving significant improvements in speed and filtering.”

And internationally, Magasin du Nord in Denmark “delivered further progress despite a weaker market background.”

STORE CLOSURES

Now for those stores closures. The company is aiming to save an additional £30 million on top of the £20 million in annual savings already being delivered and is to close up to 50 stores in the next three-to-five years. Last year it had said that only around 10 stores would close.

It said Thursday that “unlike many of our store-based retail peers, we do not have a long tail of loss-making stores. However, our UK occupancy costs account for £290 million or 13% of current GTV. Our analysis shows that approximately 110 of the 165 UK stores are currently over-rented.”

That means an “annual occupancy cost headwind of £12 million." So it's "actively in discussions with landlords about reducing and re-gearing opportunities to mitigate this headwind, benchmarking against recent changes achieved by some competitors.”

The stores now likely to close are operating “in challenged markets where we no longer see a long-term future.” They’re profitable but account for a lower share of sales and profits and might not be profitable in a few years' time given current trends.

It has identified 100 stores that are core "in flagship and vibrant markets where we can see a positive return on future investment”. But with the 50 closures, that still leaves a small number of squeezed between the two groups and it looks like these will remain but will be run as cheaply as possible.

Does it all mean that company voluntary arrangement is on the cards too for the firm that employs 27,000 people? It looks like Debenhams isn’t planning for this (although, like a no-deal Brexit, it’s something that we can’t assume won’t happen). It seems to be hoping that it can negotiate with landlords rather than going through a formal CVA process.

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