Designs on the high street
While M&S is finding fashion a tough sell, exclusive and affordable ranges are helping Debenhams to expand
It was a view not shared remotely by Debenhams' management but around the time of the Woolworths collapse nearly four years ago the department store chain was cited as a possible retail casualty. After all, its share price had sunk to 22.5p in December 2008 – a country mile from its float price of 195p in May 2006 – and despite often robust trading, the City was obsessed by its almost-£1bn of net debt.
Following another set of strong trading figures yesterday, such views seem to be from a bygone era, as Debenhams has emerged as one of the retail winners of the consumer downturn. The retailer delivered an accelerated 3.8 per cent rise in like-for-like sales over the 10 weeks to 1 September after it powered through the wettest summer on record.
Michael Sharp, who became chief executive in September 2011, said: "This shows just how resilient Debenhams has become. Customers kept coming in because they like the unique products and brands."
Debenhams is forecast to grow its annual profits by 2 per cent to £160.2m in 2011-12, according to Peel Hunt, leaving many of its retail rivals looking down the high street enviously.
The retailer, which traces its roots back to 1778, has engineered this turnaround by pulling a series of self-help levers, such as expanding its number of exclusive Designers at Debenhams and other own-brand ranges, pushing online and refurbishing its stores.
More simplistically, it has also given female shoppers fashion that they want at the right price, which it not something that rival Marks & Spencer has demonstrated recently.
For instance, Debenhams grew its share of the womenswear market by 0.2 percentage points over the 12 weeks to 5 August, according to Kantar Retail. However, retail historians will also look back at the £323m rights issue it completed in 2009 as a crucial step in slashing its debt and associated painful annual interest-rate payments.
Mr Sharp, who joined Debenhams as trading director in 1997, says: "The refinancing in 2009 was very much the start of progress in the right direction for the balance sheet."
Debenhams' much lower current net debt of £370m has given it the freedom to invest robustly, with its store opening and refurbishment programme among the most eye-catching. While much of the high street cuts its store estate, Debenhams plans to open 14 new department stores over the next five years, adding 7 per cent of new trading space
The group, which has 240 shops across 28 countries, has also refurbished 18 stores in the UK in the past nine months.
Impressively, its modernised stores are delivering an average sales uplift of about 6 per cent inside the first year and a further 1.5 per cent over the second year. John Stevenson, an analyst at Peel Hunt, says: "The refurbishment programme is starting to gain traction and it does have a big impact, particularly on the new perfume and health and beauty areas. It is a big driver of footfall into stores."
Associated with the refurbishment programme, Debenhams has made a huge push over the past two years to increase the volume of own-brand products sold in stores, which give it better margins than concessions.
This has been particularly pronounced in categories such as female shoes, boosted by its acquisition of Faith in 2010.
Two years ago, 90 per cent of Debenhams' women's footwear sales came from concessions and 10 per cent was from own-brand but now the split is around half for each.
At the heart of Debenhams' own-bought strategy are its Designers at Debenhams products, which it launched in 1992. It yesterday added Marios Schwab to its list of more than 20 designers.
Such ranges are also powerful drivers of online sales at Debenhams, which jumped 40 per cent in the past year. The chain gave its online operations a boost earlier this year by introducing its "endless aisles" initiative, which is intended to increase fulfilment by using stock from its biggest stores, as well as dedicated warehouses, to meet demand on the internet.
Beyond these shores, Debenhams has aggressive plans to nearly double its number of franchised stores from 67 in countries from India to Vietnam to 130 in five years. The group opened its first store in Russia on 1 September and Mr Sharp says overseas is "increasingly important" for the retailer.
However, it wasn't all rosy for Debenhams over the past 12 months, as it said its gross profit margins fell by 30 basis points. It blamed this partly on people buying more lower-margin health and beauty products during the wet summer. And despite its shares closing at 99.2p yesterday – up by more than two–thirds in the last year – Debenhams remains a long way from its 2006 float price.
But overall, the retailer has defied the doom merchants over recent years and it appears to be a hive of activity at present.
Mr Stevenson says: "If you look at the self-help opportunities compared to Next and Marks & Spencer, on the face of it there seems to be lot more going on at Debenhams in terms of driving core profitability."
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