Mon, 3rd November 2008

Debenhams goes West(field) - and east and north and south

The disparity could not have been more obvious between Debenhams and ASOS when the leaders of both companies spoke recently at an investment conference.

By Glynn Davis

While Nick Robertson, chief executive of ASOS, highlighted the benefits of being debt-free and not having to worry about store openings his counterpart at Debenhams Rob Templeman sought to assuage fears about the company's high level of debt and the capital expenditure on its store expansion programme and refurbishments.

At least this week Templeman was able to escape briefly to a more upbeat world as he unveiled the new Debenhams store to City analysts at Westfield London ahead of the official opening on October 30. And judging by the early feedback it was pretty well received.

Investec Securities highlighted some key positives including: extra service-led features, a higher own-bought mix and a fit-out cost that probably comes in at £50 per sq ft. This compares with around £200 for the Marks & Spencer's Westfield store. Such conservatism will likely contribute to capex falling to £110 million this year compared with the £130 million of last year.

This penny pinching is just as well as Debenhams' key issue (like many other retailers in the current tough market) is conserving cash. It is very carefully balancing the servicing of its near-£1 billion of debt and splashing out on new stores as well as the refurbishment of its older stores.

It has been accused of failing to address the needs of these outlets, but regardless of whether this is true or not the slashing of its dividend last week will put some much needed extra cash in its coffers.

It is the debt that continues to weigh heavily on the company and has played its part in driving Debenhams' share price to bargain basement levels - having touched an intra-day low of 22.5p in mid-October. They have since regained some poise to currently stand at 37.5p but this is still a world away from their 12-month peak of 118p (but then what retailer isn't well off its highs).

The line from Templeman is that he has operated with greater leverage than this in the past. However, what worries analysts is that Debenhams has little head room and a fall in trading has dire consequences - every one per cent fall in like-like sales cuts £10 million from its gross profits.

It doesn't take a mathematician to work out that the 4.2 per cent decline in like-for-likes at the start of the new financial year would have a devastating effect on the company's finances if it were to continue.

This will not distract the company from its openings programme as Templeman has suggested it is "absolutely key for Debenhams to keep opening" as the business achieves a return on capital employed of 40 to 45 per cent. He believes the UK can support many more stores and the pipeline currently contains over 20 units although the axing of some shopping developments could put the kybosh on a number of these - a small batch already look dead in the water.

If this number of non-starters accelerates then this could put increased pressure on Debenhams as it undoubtedly relies on this opening programme to keep the embers of interest in the company from City analysts burning.

The performance at Westfield of the new Debenhams store and the overall development will be a key indicator of the company's likely fortunes over the short to medium term. Despite the defensive qualities of department stores some weak numbers at Westfield will dent the prospects for the business and its ongoing expansion.

glynnd@theretailbulletin.com