Debenhams makes record annual loss and plans up to 50 store closures

Media caption,
Debenhams boss Sergio Bucher says the chain wants to have fewer but better stores

Debenhams has posted record annual losses and said it will close up to 50 stores, putting 4,000 jobs at risk.

In the year to September the department store group lost £491.5m, against profits of £59m the year before.

Debenhams, which has 165 branches, previously said it planned to close 10 stores.

Boss Sergio Bucher said the company was "taking tough decisions" on stores where financial performance was likely to deteriorate over time.

The retailer is not releasing a list of the stores at risk of closure.

Image source, Reuters

Mr Bucher said in a statement that the additional 40 stores earmarked for closure were "currently contributing positively" to the business, but added: "However, rolling forward current trends, we do not believe they will remain profitable in future years and therefore we intend to exit these stores over the next 3-5 years."

The BBC understands about 4,000 jobs could be affected by the changes, but Debenhams said it hoped there would be a "minimum" of compulsory redundancies and that some of the departures would be people who would have left the business anyway.

Why are the figures so bad?

The chain was plunged into loss by exceptional write-downs of £512.4m, including reductions in the value of its goodwill, stores and IT systems.

Without this, it would have made a pre-tax profit of £33m.

However, Debenhams has also been buffeted by pressures facing the whole of the UK High Street.

Sales in its UK branches fell by 6.3% over the year, amid what it described as a "volatile" market background. However, its online business grew by 10%.

The popularity of online shopping has coincided with consumers' increasing appetite for "experiences" such as beauty treatments, on the High Street. Add to that the rising overheads faced by bricks and mortar retailers and their mounting problems have seldom been out of the headlines this year.

Earlier this month, rival department store chain House of Fraser was bought out of administration by Mike Ashley's Sports Direct. And other retailers, including Marks and Spencer and Mothercare, have announced branch closures.

How worrying is it? A question for BBC business correspondent Emma Simpson:

This is a massive loss for such a small business, even though the sea of red ink can be explained by one-off accounting adjustments.

Debenhams is still profitable. But it only made £33m, despite £3bn worth of sales. Its biggest headache right now is property.

Big department stores are expensive to run. Debenhams is tied into a lot of lengthy, inflexible leases with upward-only rents. Its business rates bill this year will be nearly three times as much as it made in underlying profits.

Meanwhile, Debenhams costs are rising faster than its sales, partly because we're now shopping so much online. One in every £5 at Debenhams is spent via the internet. So it is finally grasping the nettle and reshaping its business, hard as it will be for the High Streets and town centres it will eventually leave behind.

Twenty-five leases are up for renewal over the next five years, allowing Debenhams to hand back the keys. The question is, will landlords allow Debenhams to call time on several dozen more, as the shake-out in retail continues.

Image source, Getty Images

What is Debenhams doing about it?

Debenhams has been undergoing a revamp aimed at reviving its fortunes, redesigning stores and introducing new "experiences" including beauty treatments and prosecco bars.

Called Debenhams Redesigned, the firm said the new format stores will deliver a "sociable, easy and fun" shopping experience, and it has already modernised nine of its stores.

It is planning to implement a similar overhaul in a "profitable core of up to 100 stores in flagship and vibrant markets" where it could see a positive return on future investment.

These stores account for more than 80% of the chain's profits.

There are a further 20 stores which are profitable now, but which are "not likely to deliver a return on further investment". Debenhams said it was seeking "alternative solutions" for those outlets, depending on where they were.

The retailer is also aiming for its online business to account for about 30% of its business, compared with 20% at the moment.

What does the future hold?

Richard Lim, chief executive of Retail Economics, said Debenhams was operating in the part of the market under the most intense amount of pressure.

"Put simply, department stores are incredibly expensive to run," he said. "The combination of too much space, inflexible leases and spiralling operating costs are set against a backdrop an accelerating behavioural shift towards online and experiences. This is eroding their profitability and changes in the business need to occur at a pace if they are to survive."

Hargreaves Lansdown's senior analyst Laith Khalaf said: "The Debenhams share price has lost four fifths of its value in the last year, and no doubt some will be wondering if we are now near the bottom.

"Despite the dramatic drop, this is still a business in a state of transition, and while the upside could be considerable if Debenhams turns things around, there is still a risk of further losses, particularly given the fragile and dynamic consumer environment."

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