After high street chain Debenhams called in advisors KPMG to investigate turnround options that may also include a compulsory voluntary arrangement, a form of insolvency proceedings that can be used to close stores and renegotiate rents.
Earlier this year, Debenhams posted a profits tumble of 85%, which it blamed on the adverse weather conditions experienced throughout the UK.
The department store chain, whose shares dropped 17% with the news this morning, is in the midst of cutting costs with flash sales with the firm stating in August that 80 to 90 jobs at its headquarters would be shed.
Debenhams, has since, looked to quell investor concern about the company’s financial situation by rushing out a surprise trading update today which showed profits were slightly below expectations.
The firm shocked the market by releasing its results a month early, saying it expected profits to be within the market range of £31m to £36m, falling just short of its expected target of £35m to £45m which it reported in June.
Analysis: Patrick O’Brien, UK retail research director at GlobalData
Debenhams statement reacting to media speculation over its future has singularly failed to address investor concerns.
While trying to give reassurance with regards to its short term performance – earnings and debts are running at expected levels, and the new season has seen ‘positive trends’ – it ignored the real reason why investors had punished its stock this morning: fear that its decision to bring in advisors KPMG is a prelude to a CVA, or worse.
While it would seem too early to try to foist a CVA on landlords who are already seething at what they deem to be an inherently unfair process being abused by retailers, Debenhams appears to be softening them up for some form of negotiation.
Debenhams may still be profitable and has the possibility of bringing in £200m plus from the sale of Magasin du Nord, but its long term performance is still going to be under huge pressure, and with it carrying £4.6bn of lease commitments (as of September 2017), both it and its landlords know that these will need to be addressed soon unless there is a marked upturn in the fortunes of the UK high street.
Analysis: Dr Fletcher, University of Salford Business School
Last month’s purchase of House of Fraser by Mike Ashley’s Sports Direct group was a significant moment in the changing face of the UK High Street.
Now another retail icon is seeking professional advice around its future. Debenhams is now considering the use of a Company Voluntary Arrangement (CVA) in an effort to manage the overhead of its massive rental bill. The news of these discussions has hit Debenhams’ share price seeing it sink to just over 10p.
With Mike Ashley owning nearly 30% of Debenhams and having previously been rumoured to be interested in a complete takeover, this is a warning signal to expect change. The use of CVAs by large retailers in the last two years has had a poor history with many of the large retailers attempting to use this mechanism later failing completely, examples include Maplins, Toys R Us and Cau restaurants.
CVAs attempts to unlock retailers from long-term and expensive leases. The proposal is inevitably an unappealing action for the landlords of the affected commercial properties – who have to satisfy their own investors.
All of these attempts to save the icons of the high street should reinvigorate discussions around the use of turnover-based rental. This approach shares the risk of operating on the high street by giving property owners a vested interest in the success of retailers.
Analysis: Diane Wehrle, marketing and insights director, Springboard
The issue for Debenhams is that it has caught the “department store disease” of a lack of attention to its customer combined with an inactive investor who has not injected sufficient monies into the business in order for it to future proof itself.
Department stores such as Debenhams rely on brands for their success, the vast majority of which can be purchased with equal ease online. So for bricks and mortar stores it is therefore the experience delivered that separates the winners from the losers and Debenhams has simply not delivered on this.
The appointment of KPMG reflects the difficulty of the situation that Debenhams now finds itself in. Ultimately the choices available will be limited, but inevitably given its current level of debt and the need to allow for additional debt to carry it over the Christmas trading period, any proposal will involve cost cutting.