Debenhams (LON:DEB): Turnaround Share or No Way Back?

One of the most punished shares in recent times has been Debenhams, and not without good reason: a combination in being in one of the more unloved segments of the market (retail) as well as worsening results has seen the share price take a battering over the years. And things were made no better with the release of the interim results today, which showed profits falling, and debt increasing. This theme has been nothing new though, and looking at the share price action it’s pretty much followed Debenhams standing on the high street: a slow decline over the past few years:

But is there anything good to be salvaged from this? The market has discounted the shares so far that at some point, value may emerge. After all, the share price is now a fifth of what it was a few years ago, and going back to the mid-2000’s, even less: just 10% of the value. Considering the market as a whole, it’s not too difficult to see what has happened: Debenhams hasn’t changed much at all, but consumer tastes have. Most, if not all of its current offerings are done better in other places.

Is it the end for big stores? Some may say yes, but I’d slightly disagree with that. Other similar firms in this sector are House of Fraser, John Lewis, and perhaps Marks and Spencer. The first two have the advantage of Debenhams for a much higher perception of quality and also a lower store count. Marks and Spencer do not have *as* large a store as Debenhams but have diversified themselves away a little: if it wasn’t for food they’d probably find themselves in a similar position.

One buzzline that many retail analysts are pointing out is that people are buying more experiences as opposed to things. Yet few of the big stores have made any definitive moves into this. John Lewis and Debenhams are making tentative moves by refreshing some of their stores, and it’s not difficult to see why, as switching up to experiences costs a lot of money, simply getting more products into sell does not.

Here’s what Debenhams are proposing:

I am not particularly sure if any of these will end up working. The first two are particularly vague. One of the problems with online growth for a company like Debenhams is that it may take away footfall from the stores. It is also difficult to see them offering a more innovative customer engagement then more mobile, smaller operations. Simply replying to people on Twitter is not innovative. Fashion-wise I think Debenhams are a bit snookered; the sheer range of brands available in shop just adds to confusion.

The changing in-store experience is valid enough, as it is high time that the stores were shaken up. Debenhams main weakness could also lead to being a strength in that most of its stores are too large and inefficient. At the stores I have been to, you can almost smell a divide: the menswear floor and home furnishing floors are quiet, the womens floors are busy enough. If they are wishing to change up their stores and offer more experience-related items, then at least they have the space to do it.

One particular question is whether they may run out of time. The £20m additional annualised savings are material, but as the last accounts showed, things are not pretty:

Transaction volumes have stayed the same, but profit has plummeted – a clear sign of having to discount products. The difference between reported profits was justified by expenses related to the new concepts, but unfortunately for them this type of cost will be a constant theme if the new fit-outs are rolled out to more of their stores. At this stage, revolution not evolution is required, and that doesn’t come cheap.

Debenhams have £270m of their £520m facility left, but as more of this gets used up and profits keep on dwindling I can see the markets getting more and more nervous. Full year profits are estimated between £50m and £61m which may be a fair assumption. 

One potential factor is the presence of Sports Direct. With a near 30% holding, they will be heavily influential, although I feel an outright takeover is unlikely, they will be none too keen on Debenhams going down the equity raise route. I do believe that eventually like we saw with Game Digital, they will end up with Debenhams granting them concessions at a very cheap price, for instance providing a white-label solution for their sporting goods department.

At the moment, there is too much uncertainty about their future plans. Trading with a stop-loss in place makes little sense here, as normal market movements can knock 10% or more out of this at these low figures. If you’re willing to gamble, the upsides could be tremendous if Debenhams do end up re-inventing themselves.

 

Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.

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