Debenhams – store closures a necessary evil, but not the solution
The implications of the CMA blocking the proposed Sainsbury’s/Asda merger, the first round of Debenhams store closures, full-year trading figures from Boohoo, interims from Primark and Reiss.
7 minutes to read
- Ongoing strong performance from Primark. Adjusted operating profits for the 24 weeks to 2 March increased by 25% to £426m, while total revenue was up 4% to £3.6 billion. Global sales at the value retailer were up 4.4% year-on-year. However, this growth was largely driven by increased selling space, with global like-for-like sales declining 1.5%. UK like-for-likes were up by 0.6% (+2.3% overall). Continental European sales grew 5.3% year-on-year, but like-for-like sales fell by 3.2%, which it attributed to a decline in the German market and low footfall generally in November.
- In sharp contrast to fellow online pure-play operator ASOS, Boohoo has recorded bumper annual profits. Overall revenue surged by 48% to £856.9m in the year to 28 Feb, while pre-tax profit jumped 38% to £59.9m. Revenue at the PrettyLittleThing fascia soared by 107% to £374.4m, while Nasty Gal saw sales increase 96% to £47.9m. Sales at the eponymous Boohoo fascia grew 16% to £434 m. The business was the latest retailer to dismiss assumptions that Brexit was having a negative effect on consumers: “young customers are not worried about Brexit and they’re spending money on clothes. We’re not experiencing any kind of slowdown”.
- The benefits of brand integrity personified at Reiss. In the 25 weeks to 2 Feb, the upscale fashion retailer posted a 21.3% increase in EBITDA to £19.3 million. Total sales advanced 8.3% to £186.3m. The business attributed the strong performance to lower promotional activity and a focus on full price sell-through, which delivered year-on-year margin growth
Stephen Springham, Head of Retail Research:
The two major retail stories this week have undoubtedly been the CMA blocking the proposed merger between Sainsbury’s and Asda and Debenhams finally launching its CVA and announcing the closure of 22 stores. Both newsflows were expected, but that does not make them any the less depressing.
I have written extensively on the proposed Sainsbury’s/Asda tie-up before. It became clear that the deal was not going to be approved when the CMA made their initial findings public a few weeks ago. In essence, the merger was blocked because it would result in “substantial lessening of competition” and “was more likely to lead to price increases than price cuts”. In the real world, significantly detached from models of the CMA, the grocery market is definitely the most fiercely competitive retail sector in the UK, probably in in Europe and possibly the world. Would any “lessening of this competition” make it suddenly un-competitive? Of course not.
To the second point, the very last thing a merged Sainsbury’s/Asda business would have looked to do was to hike prices. Market forces simply would not allow them to do so. The CMA’s notion that the deal would be bad for consumers couldn’t be wider of the mark.
If a merged Sainsbury’s/Asda in any way took advantage of its enlarged status to alienate shoppers, they would simply take their trade elsewhere. Sainsbury’s/Asda would effectively be shooting themselves in the foot. In retail, consumer is always king. Sainsbury’s and Asda know this. But the CMA clearly thinks it can second-guess the king and make judgements of which the king is incapable.
Be that as it may, the proposed deal is now dead in the water and the question is where both businesses go from here? There has been considerable over-reaction to this in the media and amongst hack analysts. The key point is that the deal was largely opportunistic from the outset and neither side necessarily needed the other to survive and thrive (and this was always one of the key arguments against it).
Management on both sides may have argued to the contrary over the last year, but only the naïve would expect otherwise. After all, Sainsbury’s (more so than Asda) not only had to convince the CMA, they also had to get buy-in from investors and the City generally. Being lukewarm on the deal was hardly going to achieve this.
And this should not necessarily presage the departure of Sainsbury’s CEO Mike Coupe, as many are assuming. Sure, the City doesn’t like U-turns, as this clearly is. But Sainsbury’s isn’t a distressed retailer in dire straits, it is mildly under-performing at worst.
Where does it go from here? Re-focussing on the fundamentals of being a better food retailer (product quality, product availability, investment in stores, appropriate staffing levels) may seem less exciting than a mega-merger, but they are disciplines on which a grocery retailer succeeds or fails.
Seemingly small things make very big differences. There is much work to be done here (not to mention the ongoing integration of Argos) and if there is any residual criticism of the Asda deal, it is that too much management time and attention has been distracted from the day-to-day running of the business.
Asda seems to have emerged from the failure of the proposed deal with its reputation more in tact. Which is curious, in so far as its future is far less certain than that of its former suitor. Recent sales performance has admittedly been somewhat stronger than Sainsbury’s, but this comes after a number of years of under-performance.
Having a parent (Walmart) that apparently doesn’t love you anymore and still being more exposed to the capricious growth of those mean old discounters, where does Asda go from here? A sale to a private equity house (KKR?) has been touted, as has a separate stock market listing. Both possibilities, but neither course of action is a no-brainer.
Management distraction from day to day running of the business is a common denominator between Sainsbury’s and Debenhams. In the former case, the effects are likely to be temporary and rectifiable over time. I’m increasingly less convinced that this will prove the case at Debenhams.
After the pre-pack administration, the inevitable CVA has followed and 22 store closures have been announced. People always express surprise that certain stores are on the list (particularly in supposedly ‘safe haven’ affluent areas / market towns), but unless you are privy to the full P&L of individual stores, you have no idea as to how much money that store is making and how much rent it is paying.
Without this crucial information, you have no clue as to how profitable (or not) each and every store is. And this is the basis for any disposal programme. The notion that retailers make all their money in prime locations is a complete fallacy and Debenhams once again proves this.
I specifically called out the Debenhams stores in Guildford and Wimbledon in my post Xmas write-up. It is pretty clear when a store is being run for cash. The trouble with Debenhams is that most of their stores are increasingly bearing these trademarks and this is a real concern.
Debenhams has been in the limelight for some time. These stores closures are not surprisingly receiving huge media coverage, as did all the ownership shenanigans and the Mike Ashley soap opera that preceded the CVA. In contrast, the strategic direction (or lack thereof) of the business in the interim has largely been ignored.
To say that Debenhams has drifted over the last 18 months is far too kind. It is deteriorating at a rate of knots. Even those stores that are being retained (for now) are going to pot and increasingly resemble under-supplied jumble sales. Basic in-store / retailing disciplines have gone out of the window. To both the analyst and, much more importantly, the customer, the decline is plain to see.
Closing stores is a necessarily evil in restoring retail fortunes. But it is not a solution in itself. Debenhams may be able to slash its cost base by reducing its physical footprint, but this will also have damaging implications to other parts of its business. Clearly, it will reduce sales.
Where a store closes, only a portion of that stores sales will be recouped elsewhere. Using Next’s rationale / indicative metrics, less than 25% of sales will transfer to another store in the portfolio. Contrary to popular belief, virtually zero will transfer online. Most will go to a competitor, or simply disappear into the ether.
Lower sales = lower scale. Lower scale = lower operating efficiencies and lower supplier negotiating power. Lower operating efficiencies and lower supplier negotiating power = higher costs.
The only way this vicious circle can be broken is if the top line starts to move positively again. Otherwise, you are stuck in an eternal downward spiral. And this is my biggest fear for Debenhams – I see nothing strategically that will drive top line growth in the longer term.
A case of a good retailer going bad in a very short space of time. And not just any retailer, the UK’s largest non-food high street operator. Some of this was self-inflicted, but a lot wasn’t. Either way, it should never have come to this.