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Debenhams - 40m cash injection secured

Nicholas Hyett | 12 February 2019 | A A A
Debenhams - 40m cash injection secured

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Debenhams has agreed £40m of new borrowing facilities. The cash injection extends the group's borrowing options for a year, while it works on a longer-term refinancing plan. It's also entered a supply-chain partnership with Hong Kong's Li & Fung, in a bid to improve product quality and boost margins.

The shares rose 39% on the news.

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Our view

Times are tough for Debenhams.

Sales are falling despite the trusty blue-cross-sale stickers finding their way back onto shelves. Not only does that undermine efforts to shift the 'serial discounter' image, but it's squeezing the group's already wafer thin margins too.

Troubles at John Lewis and House of Fraser are evidence the difficulties aren't all of Debenhams' own making. But that only makes turning things round all the tougher.

Shutting underperforming stores has set Debenhams back £117.5m, and further closures look likely. The group is scrambling to save the pennies where it can - a new supply chain deal with a Hong Kong Specialist should help with cost savings. But that won't do much to ease worries about falling cash flows, and increasingly intimidating debts.

The extra £40m of credit recently secured may help keep the lights on for now, but more is needed in the longer-term.

CEO Sergio Bucher hasn't yet been forced to sell the family silver - namely the Danish Magasin du Nord business, but the dividend has gone, operational cost savings are being prioritised and spending on store refits and maintenance is also getting wound back in.

The scope of the spending cuts means one has to wonder what the future holds for the 20 stores Debenhams has earmarked for a 'low-cost' approach.

It's not all about closures and cost savings though. Debenhams's wider strategy calls for a revamped store format and tacking restaurants and gyms onto existing stores to fill unused space. Sub-letting excess space is worth a go as a short term fix but we have our reservations. Browsing for cardigans and pumping iron don't really go hand-in-hand.

Impressive growth in online sales is a ray of bright light. Around £1 in every £5 now comes from online purchases and the CEO knows a thing or two about growing this part of the business, having been recruited from a senior position at Amazon. But having been booted off the board by two of Debenhams' largest shareholders, uncertainty around Bucher's tenure is growing.

The challenges facing the group are great, and look all the more acute in the current economic environment. Earnings forecasts have been tumbling, and the shares are among the most shorted on the stock market.

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Christmas Trading Statement - 10/01/19

A Christmas trading statement from Debenhams, showed gross sales for the 18 weeks to 5 January fell 5.6% with like-for-like sales down 5.7%.

Looking ahead, the group remains on target to hit profit forecasts, but only after identifying another £30m of extra cost savings, taking the total to £80m per annum.

The UK trading environment remains challenging, with like-for-like sales falling 3.6% in the 6 weeks around Christmas and by 6.2% over the full 18 week period as declining in-store sales more than offset a 4.6% rise online.

LFL sales fell 3.5% in the International business over the 18 weeks.

With customers searching harder for bargains, Debenhams has had to increased promotional activity, and says first half margins are likely to suffer as a result.

The 9 stores trading in new design format have outperformed the core chain, with the group also highlighting more positive news in Beauty and Womenswear.

Net debt as at 5 January was £286m, within the context of the total committed debt facilities of £520m. However, the group needs to refinance obligations in the next 12 months. Discussions with lenders are ongoing, with asset disposals on ice until talks have concluded.

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