By Oliver Haill
Date: Thursday 20 Apr 2017
(ShareCast News) - Debenhams' new chief executive Sergio Bucher unveiled his strategic vision for growing the department store group, centred around making the stores a more enjoyable destination for 'social shopping' and driving efficiency through 'simplifying and focusing' the business.
Interim results, reported alongside this strategic update, were unexceptional but in line with expectations, with UK like-for-like sales rose 0.5% and gross transactions up 2.9% to £1.7bn.
Profit before tax fell 6.4% to £87.8m and earnings per share dropped 6.5% to 5.8p. The interim dividend was held flat at 1.025p per share, as operating cash flow before financing and taxation shrank to £108.7m from £133.5m last year but net debt was trimmed to £216.9m from £224.2m.
Bucher's 'Debenhams Redesigned' plans took centre stage, as the ex Amazon fashion chief stated that a chief aim was to "define clearly what Debenhams stands for and simplify the way we operate to benefit customers today and therefore shareholders in the future", aiming to drive visits online and offline by investing in a mobile-led digital update and simplification of supply chains and decluttering the stores store estate.
The strategy involves "leveraging existing assets, including good stores in strong locations; leading market positions in key product categories; and profitable and growing international business", with a cost of £450m over the three years to 2020, which is £100m more than previously planned, plus exceptional costs of £50m.
Consultation is beginning on the closure of one central distribution centre and around 10 smaller regional warehousing facilities, while up to 10 UK stores out of 176 will be reviewed for closure over the next five years, and the Swiss-Spanish CEO plans to exit some brands and non-core international markets.
The concept of social shopping is based around the feeling that "leisure is increasing share of consumer spending. For Debenhams customers, the leisure experience is an important part of shopping and mobile interaction growing fast," which provides an opportunity for Debenhams to lead in this category.
To drive efficiency, on top of the simplication of the store estate and forging a closer link between stores and digital, Bucher also aims to make "more effective use" of staff, inventory and infrastructure.
One measure already under way will see around 2,000 more staff moved to customer-facing roles, with stores decluttered amid a 10% reduction in stock options, with stock replenished faster and new in-store formats to be tested.
Market and analyst reaction
DEB shares were down more than 5% in early trade on Thursday to 52.53p, remaining in the channel between 52p and 58p that had formed since mid September.
Independent retail analyst Nick Bubb said the much-awaited strategic update overshadowed the interims.
"But the implication is that Debenhams is, like other department store chains, running up a down escalator, so the emphasis in the new strategy," he said, adding that it generally "sounds positive".
He was disappointed that Bucher failed to take the opportunity to offer shareholders any sales or profit targets against which the new programme should be judged.
"We are sure the new CEO Sergio Bucher is capable of showing off some exciting new store redesign plans etc, but we can't see anything obvious here to get the lowly share price moving up."
Analyst Sanjay Vidyarthi at broker Canaccord Genuity said his initial sense was that Bucher was saying "all the right things...But there are no targets or quantification of return on investment".
He added: "For a business with a mature UK store portfolio, a 4% group EBIT margin and a negative forecast earnings trajectory FY15-19E, more is required before we could turn positive on the investment case."
George Salmon at Hargreaves Lansdown said it was unsurprising that Bucher's vision for the group focuses on harnessing the potential of the internet to drive sales forward and implementing a new, more innovative culture.
"However, telling people what you want to do is very different to actually going out there and doing it. After all, one of Warren Buffett's most famous lines is 'when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.'
"Debenhams has struggled for years and has a large and inflexible store estate. Add in the wider issues facing the UK's high street retailers, and it's easy to see why the shares change hands for just 8.6 times expected earnings."
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