Debenhams – a gauntlet to landlords rather than a CVA

• Debenhams’ FY results were dominated by news of potential store closures (see below). The actual numbers were actually in line with expectation. Underlying profit came in at £33.2m, while EBITDA fell by 27.3% to £157.3m. Total and like-for-like sales declined by 1.8% and 2.3% respectively. Predictably, the media focussed on the statutory pre-tax loss figure of £495m which was struck after exceptional goodwill write downs and store impairment charges. 
• Better fortunes for the UK arm of Zara. Zara UK reported a 30% jump in pre-tax profits to £51m for the year ended 31 Jan 2018. Sales were up 17% to  £704m. The Inditex-owned retailer operated 64 stores across the UK at the year-end, two fewer than the end of the previous year.
• Impressive figures from Home Bargains. The value operator reported a 20% uplift in pre-tax profits to £202.7m in the year to 30 Jun 2018, as revenues increased by 15% to surpass the £2 billion threshold. Growth was driven both by new store openings (of which there were 32) and like-for-like improvements. It ended the financial period with a store network of 480, a figure which it intends to increase to over 500 in its next financial year, towards a longer term target of 800 – 1,000.

Stephen Springham, Head of Retail Research:

“Up to”. The two most important words in Debenhams’ full year results release today. “Up to” 50 stores will close over the next 3 – 5 years, rather than the 10 already flagged.

Retailers are no strangers to the phrase “up to”. How many bold as brass “75% off everything” in-store promotional banners are pre-fixed with a much smaller font “up to”? Shoppers have long since wised up to this particular ruse; few would be naïve enough to still take this at face value and expect such a huge blanket discount across the store. Why, therefore, are we (OK, the media) ignoring the “up to” small print of the store closure announcement?

I sincerely doubt that, when all is said and done, as many as 50 Debenhams stores will actually close. Tellingly, a list of affected stores has not been made public. Although this is not peculiar in itself,  usually reliable ‘contacts’ and lorries that are well-known for having things fall off the back of them have yielded nothing. My suspicion is that although Debenhams’ senior management has a handle on its desired direction and fate of every store in the portfolio, the magic figure of 50 is actually a fairly notional one and a definitive disposal list may not even exist. 

The news generally and all the added uncertainty it brings are obviously desperately unhelpful for both landlords and property advisors alike. No one knows where they stand. At the risk of incurring the wrath of our highly valued landlord clients, I think this is actually a very smart move on the part of Debenhams. It keeps landlords guessing as to whether their particular asset will be affected and what their course of action will be, if indeed it is.

The subtleties of the “up to” prefix are also a signal of intent that Debenhams is going to embark upon widespread negotiation with landlords going forward. And these negotiations are likely to extend far beyond the 50 worst performing sites and will actually encompass most, if not all, of the portfolio. But surely this is better than going down the CVA route, where landlords are given a “take it or leave it” ultimatum with a ridiculously short timeframe to reach a decision and very limited grounds for negotiation? There is an opportunity here for landlords and a major retail tenant to have meaningful, adult negotiations. Negotiations will be tough and compromises will have to be met on both sides.

There are some key messages here that resonate with whole retail industry. Although Debenhams has stressed that virtually all its stores are currently profitable, decisions are being made “where financial performance is likely to deteriorate over time”. In other words, it is taking a long-term view in a sector which has always been blighted by short-termism – with retailers and landlords (and dare I say agents) as guilty as each other. If more people had taken a more long-term view in the past, maybe we wouldn’t be in the precarious position we are in now.

When all is said and done, I’m hoping that “up to” 50 closures will actually amount to a much lower figure.  But there is an awful lot to be said before the final disposal tally is determined. And infinitely more to be done.