Debenhams and TopShop: rescue or ruin?
COVID-19 Market Update – 29/01/2021
13 minutes to read
Introduction
This is the 31st of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores three key themes:
- Implications of Boohoo’s acquisition of Debenhams
- Ramifications of ASOS taking over Topshop/Topman
- Other festive reporting
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Boohoo acquires Debenhams for £55m
• Highly opportunistic deal
• Only taking on brand and online business
• 118 Debenhams stores to close
• 12,000 staff will be made redundant
• Short term disruption of stock clearance
• Longer term ca. £1.5bn of spend capacity in play
• M&S/Primark/Next/H&M to benefit most?
• Not obvious strategic fit between Boohoo/Debs
• Boohoo also circling Dorothy Perkins, Wallis, Burton
• ASOS clear front-runner to acquire Topshop/Topman
• Clearer synergy between ASOS and Topshop/Topman
• All Arcadia stores ultimately likely to close
• Possibly Topshop flagship(s) retained
• A further 13,000 staff facing redundancy
1. Implications of Boohoo’s acquisition of Debenhams
A great opportunistic deal for Boohoo. But surely not the “best outcome” for Debenhams that its administrators proclaim. A bitter body blow for the high street, even more desperate for the 12,000 staff that will lose their jobs. A sign of the times, but a worrying one nonetheless. And the world has gone mad – or at least the City has. A summary of my initial take of the news this week that Boohoo is to acquire Debenhams.
The online pureplay is to acquire Debenhams from the administrators for £55m, reportedly trumping other bids tabled from other multi-channel operators. Boohoo will only be acquiring the Debenhams brand, online business and intellectual property - all 118 remaining stores will be closed down and the retailer will depart the high street after a presence spanning 240+ years.
This could be the deal of the century for Boohoo and any suggestion that it is not necessarily the best outcome for Debenhams is by no means a reflection on them as an operation. On the contrary, Boohoo is one of the best retailers in the UK, with its acute understanding of its customer base and ability to meet/exceed their aspirations in terms of product, marketing and fulfilment making it a modern-day example of fantastic retailing. And this is, of course, reflected in its trading track record.
It is effectively acquiring Debenhams for a song, just £55m. It’s easy to forget that Debenhams is a substantially larger business than Boohoo. Debenhams’ turnover in its last financial year was ca. £1.9bn, Boohoo’s £1.23bn. But the gulf in terms of valuation is massive – Boohoo’s market cap is ca. £4.4bn, around 80x the figure it is paying for Debenhams. Not for the first time, the City has gone mad. Is the City ever wrong? If it is, it rarely admits it or seldom remembers it (Debenhams relisting on the Stock Exchange in 2006 having been asset-stripped by PE, anyone?)
The global pandemic has left the likes of Boohoo in a very privileged financial position. While other retailers have been desperately trying to shore up their balance sheet and refinance just to stay afloat, Boohoo’s financial firepower is undiminished. Any bids that the likes of JD or Next would be able to put together under such financial constraint were probably easily trumped. Would Boohoo be buying Debenhams if the department store operator were thriving in a non-COVID world? Of course not, hence why the deal is hugely opportunistic.
The deal concurs completely with the otherwise simplistic narrative of online supplanting physical stores, as does ASOS/Topshop. But media headlines this week that “Debenhams is to go online” left me a bit bewildered. Debenhams actually “went online” in the late 1990s, first through a mail order arm that morphed into an online platform. Many dismiss Debenhams as a high street dinosaur, ignoring the fact that its online business receives more than 300 million visits a year and generates turnover in excess of £400m.
As opportunistic as the deal is, Debenhams is not an obvious strategic fit for Boohoo. The two businesses have almost totally different customer bases with very little overlap and Debenhams’ proposition covers more than just fashion, most notably beauty and to a lesser degree, homewares. Boohoo has already flagged the opportunity it sees in non-fashion areas, but growing this side of the business will be a significant challenge. If they had paid a full price for Debenhams, I dare say the questions on this would be more probing.
Another key question is whether Debenhams’ existing customer base will stay loyal to the brand under new ownership. For many, this would involve making a channel shift, from physical stores to online only. The answer is: some will, many won’t. Not all that £400m of online trade will seamlessly transfer to Boohoo on Day 1 of relaunch. It will reach these levels in time, but a lot of existing trade will hemorrhage.
Other beneficiaries from the deal are likely to be the likes of Marks & Spencer, Next, Primark and H&M – those that have maintained a high street presence. And the stakes are high - £1.5bn of spend, waiting to find a new home. Amidst all the talk of retail shifting online and the artificiality of lockdown, there is still a core of shoppers that enjoy (and even prefer) traipsing round a high street or shopping centre to do their fashion shopping. Online is not an alternative. In the current environment, this is easily under-estimated.
The redistribution of Debenhams’ spend is a longer term issue. In the short term, the impact will be disruptive. When Lockdown V3 is finally lifted, the Debenhams stores will re-open temporarily to clear residual stock, which is likely to be substantial. Huge amounts of stock being dumped on the market at discounted prices is hardly going to benefit the wider fashion market still reeling from a -25% drop in demand in 2020. Further disruption is the last thing that the clothing market needs at this moment in time.
Channel politics aside, what jars about the Boohoo deal is how little of the Debenhams business is being salvaged, particularly in terms of workforce and the store portfolio. Although we don’t have transparency on the bidding process, it’s hard to conceive that any other deal that may have been tabled wasn’t “better” in a much wider context? Lower in terms of cash, but better in terms of what could be saved? 12,000 job losses is deeply disturbing.
What is to become of the 118 residual stores, plus the 40 or so that had already closed? Much head-scratching in the media, renewed navel-gazing about the death of the high street and over-simplistic re-purposing plans. But this is hardly a bolt from the blue and most landlords would have at least started to make “worst case scenario” (which this is) contingency plans. But many of these plans have not yet crystallized as actual solutions.
Some of the Debenhams stores will be reabsorbed as retail use by other operators. Mike Ashley will undoubtedly cherry-pick selected sites for his various brands, Frasers, Sports Direct and Flannels. Next, Primark, H&M, Zara, even M&S are amongst those they may take others, if not the full store, then portions thereof. Expect also some of the OOT value operators such as B&M, Home Bargains, Dunelm and The Range to run a slide rule over the portfolio. And don’t rule out some of the other, smaller department store operators such as Fenwicks or Morleys taking on a very select few.
But being realistic, we are not talking anything like the full Debenhams portfolio here, probably less than 50%. And the timeframe will be a protracted one – few retailers are currently in a suitable financial position to acquire new sites, for the reasons already outlined. Only those that are extremely well-capitalised will strike in the current market, most will wait for the dust to settle and something like normalised trading to have been re-established. We are talking years rather than months.
The reality is that there will be significant ‘holes’ in many high streets and shopping centres for some time to come. Some Debenhams’ stores will be repurposed into any number of alternative uses, but this will take time and quick wins are few and far between. As I’ve said before on Debenhams, it should never have come to this and I will forever question whether this is “the best” outcome for the business.
2. Ramifications of ASOS’ takeover of Topshop/Topman
Debenhams demise is inextricably linked to that of its fellow stalwart and erstwhile sister company Arcadia. It is no coincidence that the fate of the latter is playing out at the same time. And that a similar picture is emerging.
As widely predicted, the business is being broken up. Evans was the first to go, the outsize brand being acquired by City Chic Collective for £23m. Again, the deal includes only the brand, intellectual property, customer base and inventory and excludes the store network. It emerged this week that ASOS is the front-runner to acquire Topshop/Topman, while Boohoo is reportedly in exclusive talks to buy Dorothy Perkins, Burton and Wallis for £25m.
ASOS’ potential takeover of Topshop/Topman stands out as the most significant of these deals, largely because it is the highest profile brand in the Arcadia stable. ASOS and Boohoo are always bracketed together on the basis that they are high flying, top performing, online pure-play fashion operators. They are, in fact, somewhat different in that Boohoo is almost entirely own-brand, while ASOS majors more on third party brands, a key point of difference between the two.
In this regard, Topshop/Topman is potentially a far better strategic fit for ASOS than Debenhams is for Boohoo. ASOS already sells Topshop/Topman across its platform and therefore has far more than a working knowledge of the brand. This synergy can be realized more fully were the brand to become vertically-integrated (provided the right staff are retained). The deal makes a lot of sense and it will be interesting to see what price is paid versus Debenhams, if indeed it materializes.
But of course, ASOS has no plans to retain any of the Topshop/Topman stores. I wouldn’t be surprised if they kept the Oxford Circus flagship and possibly a few high profile ones in major city centres / regional shopping malls, but we’re talking a handful at best. And even then, largely as showcases for the brand, as much as a traditional retail outlet.
None of the remaining suitors for the Arcadia businesses are likely to have the respective store networks in their business plan, so ultimately all 400+ stores are likely to close and the brands will disappear from the high street. Next was a potential exception to this, but withdrew early from the bidding process.
The likely departure all the Arcadia brands from the high street alongside Debenhams is an indictment that is perhaps more worrying than it is sad. It is a fact of retailing that operators come and go, retailing is a survival of the fittest and there is constant changing of the guard. That brands disappear is sad, but the effect is more far-reaching.
That they are retrenching to become online-only brands is reducing choice in the key channel of retail, high streets. Some spend will remain faithful to those brands and gravitate online, some will be redistributed to other retailers. But some will remain ‘unspent’. An online-only market is a compromised , contracting one, something that neither the retail market nor wider economy needs. A world where we no longer visit high streets and merely shop at home – isn’t that we’ve got now under lockdown? Is this really the way forward?
3. Other festive reporting
A few Christmas reporting stragglers, which, as ever, carry the caveat that retailer Christmas trading statements need to be taken with a large pinch of salt.
A surprisingly bullish update from John Lewis, if a little scant on detail. Sales across Black Friday and Christmas “held up better than anticipated” and as a result profits for the financial year as a whole would be ahead of the previous guidance of “a small loss or small profit” as a result of its stronger than expected peak performance – although the Partnership did not provide a Christmas trading update. We will learn more when it reports its full-year results on 11 Mar.
Poundland parent company PepCo posted a +5.5% rise in like-for-like sales in the quarter to 31 Dec. Poundland, which qualified as an essential retailer and was therefore able to trade from its stores during lockdown, reported a +4.3% rise in like-for-like sales during the period despite significantly reduced footfall to its stores, which are primarily located on high streets. All achieved without an online business.
Fellow value operator The Works also hailed ‘robust’ interim performance. For the 26 weeks to 21 Oct, revenue was down -7.8% to £88.9m, but like-for-likes grew +10.6%. Pre-tax loss for the period was £4.3m compared to £8.5m a year before. The business saw a -24.8% decline in total sales during the 11 weeks to 10 Jan. Taking into account the performance of stores when they were able to trade and online sales, the business said it delivered +23.8% like-for-like growth.
Strong online growth could not detract from sobering figures at Joules. The lifestyle fashion operator (and ordinarily strong performer) saw group revenue fall -15.3% to £94.5m for the 26 weeks to 29 Nov. Statutory profit before tax slipped £0.4m to £1.3m and profit before tax before exceptional costs fell £4.7m to £3.7m. E-commerce sales through its multichannel platforms grew by more than +45% during the period, while active customers climbed by 160,000 to 1.6m.
Hotter Shoes “had a strong year”, during which it undertook a CVA that saw 46 of its stores close. Revenues for the year reached £45m and the business announced that its online sales rose +27% in the six weeks to 31 Dec. The footwear retailer did not report on its store sales for this period but did say that total sales for the Black Friday weekend were up +24% year-on-year.
Fast fashion operator Quiz saw group revenue tumble by -73 per cent to £17.2m in the six months to 30 Sep. It made an underlying EBITDA loss of £3.4 million in the first half of its 2020/21 financial year, compared with a profit of £6.3 million during the same period the year before. During the half, Quiz completed a store restructuring programme that resulted in lower rental costs and more flexible leases. At Sep 2020, its store estate comprised 55 stores in the UK and four in the Republic of Ireland. Five more UK stores have opened since. These trading figures predate Lockdowns V2 and V3 and the business will also be affected by the number of concessions it currently has in Debenhams stores.
Debenhams and Arcadia: 25,000 job losses, 500+ store closures, ca. 15m sq ft of vacant retail space, countless landlords and pension funds out of pocket, in-store concessions without a home, shopping centres without an anchor tenant, reduced choice on the high street, the prospect of contracting retail spend and constrained economic growth. In a world that supposedly wholeheartedly embracing ESG. Rescue or ruin, you be the judge.