In the changing world of UK retail, department stores are struggling. Last month’s collapse of House of Fraser – subsequently bought out of administration by Mike Ashley at Sports Direct (SPD) – acts as a clear warning, not just to other department stores, but other retailers selling their wares on concession or via wholesale accounts to these chains.
As Sports Direct mulls over its options with House of Fraser – specifically whether to keep more stores open than previously planned and attempt to drive the brand more upmarket – two other high-street stalwarts are fighting to maintain their place on the high street. Debenhams (DEB) has brought in experts from professional services firm KPMG to help it draw up a rescue plan. This could include entering a possible company voluntary arrangement (CVA) to help it exit onerous property leases ahead of schedule, while some suspect a possible merger with House of Fraser – under the protection of Sports Direct – isn’t out of the question. That’s despite an official statement from the latter saying it “does not intend to make an offer to acquire the entire issued and to be issued ordinary share capital of Debenhams”. But Mr Ashley might just be biding his time.
In the meantime, results from John Lewis show how hard it is to operate a successful department store in the digital age. Despite a 1.6 per cent rise in gross sales to £5.5bn during the first half of the year, underlying pre-tax profits fell by 99 per cent to just £1.2m. Per the company’s bosses, first-half profits are always more volatile than the second, but the non-repeat of property profits from the year before, coupled with a £9.1m charge for restructuring and redundancy costs and a £12.6m branch impairment charge made matters worse, as did “the most promotional market in almost a decade”. No surprise, then, that the company says full-year profits will fall substantially short of last year, impacting the group’s debt ratio – total net debt as a multiple of cash flow – which stood at 4.3 on 28 July. Management is aiming to reduce that ratio to three within five years.
We have already recommended investors steer clear of investing in Debenhams in the hope of a near-term recovery. But what about those retailers that sell significant amounts of stock to department stores? When House of Fraser collapsed EY issued a list of retailers that, as creditors, stood to lose out financially. Mulberry (MUL) soon confirmed a £3m exceptional charge, brokerage Peel Hunt later estimated sofa group ScS (SCS) would take a £1.6m hit, French Connection (FCCN) a £0.9m charge, Ted Baker (TED) £0.6m, fashion chain Joules (JOUL) £0.3m, newly-listed Quiz (QUIZ) £0.3m and clothing brand Superdry (SDRY) £0.2m.
Quiz, the fast-fashion company that listed last year, sells via 70 of its own stores in the UK, seven in Ireland and 148 concessions in the UK. Around 11 of these were associated with House of Fraser, and the rest are primarily with Debenhams. It also sells its products via the Debenhams website. The collapse of House of Fraser has actually amounted to a £0.4m provision – as confirmed by a recent trading update – so, on a rough calculation, one could assume a much larger, not to mention material, provision would be made in the event of a Debenhams collapse. In the UK, Ted Baker runs 32 of its own stores, nine outlets and 151 concessions. Around 24 concessions are based in John Lewis – only a couple fewer than House of Fraser. That suggests a similar level of exposure should John Lewis run into further trouble. Finding a breakdown of concessions in the UK for clothing chain Joules is harder, but the company has confirmed it has a wholesale partnership with John Lewis, which it intends to convert to a concessionary retail relationship.
