Buy the Debenhams dream

Prior to the announcement of Mr Butcher's strategic review this month, there were concerns that it may involve a significant ramp-up in investment, which could put the dividend - an important component of the investment case - at risk. So there was relief that the plan involves a relatively modest increase in capital expenditure from £130m a year to £150m a year over three years to 2020. Meanwhile, the decision to close underperforming stores - 10 sites have been identified as closure prospects - will also result in £50m of exceptional costs, with around half of that being cash costs. Net debt, at less than one times cash profits, does not look challenging on the face of it, but this needs to be seen in the context of substantial long-term property rental commitments (operating leases stood at £4.6bn at the end of the last financial year).

As more retail spending moves online, investors are increasingly questioning whether physical stores should be primarily regarded as a liability. This is particularly relevant to Debenhams, given its long leases (broker Investec puts average lease length at about 20 years) and sizeable rent roll (£221m last year). Mr Butcher is looking to convince investors and consumers that the shops are very much an asset, in two key ways.

Firstly the ex-Amazon executive is focused on what he calls "social shopping" and turning Debenhams into more of a 'destination retailer'. But what does this actually entail? Simply put, it means prioritising the group's mobile platform and making it the primary way it interacts with customers and encourages them to visit stores more often. This is already happening to some degree - the first-half online performance was mostly driven by a 64 per cent increase in mobile orders. The platform will now be harnessed to determine customers' shopping habits, which products are most popular and to put focus on shopping as a "fun leisure activity" that can be shared across social media.

This sounds very modern - unsurprising given Mr Butcher's online and digital background - but another part of the plan is referred to as "fix the basics". Part of this entails switching more than 2,000 staff into customer-facing roles, making sure stock is replenished faster, and making the overall store environment less cluttered. Other initiatives - such as diversifying away from clothing and specialising in more high-margin businesses such as beauty and cosmetics - will also continue. The goal is also to move Debenhams towards being a service-based retailer - to benefit from trends such as personal shopping and click and collect - rather than being product-led.

The group faces some specific challenges from rising costs, especially as a result of sterling's post-referendum fall. So far, the company has had some success in supporting the gross margin by achieving a better sales mix of full-price products and keeping promotional markdowns to a minimum. Dialling down discounts helped limit a first-half gross margin drop from 11.8 per cent to 11.5 per cent. What's more, the pound's very recent rally on the back of news of a forthcoming UK general election could help ease this pressure in the near term. The high level of fixed costs also means Debenhams' margin squeeze should naturally reverse if fortunes improve.