Debenhams back in search of growth

With its pipeline of new store openings appearing rather sparse Debenhams' looks like it will be relying increasingly on replacing concessions with own-bought goods and getting to grips with its multi-channel proposition that is still a poor effort compared to its rivals.

By Glynn Davis, City editor

In the early years of its current listed status Debenhams was focused firmly on growing via an aggressive store opening programme but this became secondary to it sorting out its onerous debt burden. Following the completion of its £323 million fund raising in June the focus has again shifted to where it will next seek growth.

Now that its balance sheet is in order and the number of stores it plans to open this year have dwindled to only three as the number of retail developments have evaporated Debenhams is in need of new growth drivers.

Thankfully it has found one in the form of shifting space away from concessions to its own-bought brands (especially its Designers at Debenhams ranges), which is delivering a double-whammy of not only being extremely popular with customers but also contributing much more profit.

The company's preliminary results last week showed that own-bought had achieved year-on-year sales growth of six per cent whereas concession revenues were suffering serious deterioration with a decline of 16 per cent across the year and a Q4-exit figure of nearly 17 per cent.

Not surprisingly the company has been moving space at a pace – over the last quarter of the current financial year it moved over half a million square feet to own-bought. With such lines now accounting for 76 per cent of store space it is questionable how much further Debenhams can go with this.

We'd have to assume there is more mileage as it has just introduced H! by Henry Holland and it purchased the Principles brand earlier in the year in what was regarded as a smart move. And management has indicated that it would be interested in further such deals.

Thankfully it now has the financial firepower to pull off such earnings-enhancing acquisitions of orphan brands. In fact, the City and the media have even been pressuring Debenhams to find a home for the cash that it chose not to use to pay down its debt.

This must be amusing to Debenhams management who for so long took it in the neck about the size of its debt burden and now find the same protagonists questioning its 'cash pile' and baying for it to deliver deals.

Whatever acquisitions it ultimately spends its money on the company has already stated that it is to recommence its refurbishment programme in the second half of the new financial year. This had been put on hold during its cash-strapped period and should help push up sales from the resultant uplifts.

The other area of potential growth is from multi-channel that currently amounts to £60 million of annual sales (equating to 2.4 per cent of group turnover). This is small fry compared to its rivals like Marks & Spencer, John Lewis and Next, with the latter clocking up £300 million a year from its Directory business.

This suggests there is much to go for but this will require a change of mindset at the company as it has not engaged fully with the process of re-engineering itself as a multi-channel business. It is in no way too late to join the party but the infrastructure needed is not a five-minute job and so it needs to push forward with this initiative with whole-hearted support from the board.

If it can get to grips with multi-channel and further develop its own-bought proposition then the future would look bright for Debenhams but this is offset by its weak store opening programme and its position as a mid-market operator that suggests it will suffer if consumer spending falls-off as unemployment kicks in. At the 85p level and a PE of 13x there may be some mid-term downside in its shares.

glynnd@theretailbulletin.com