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Debenhams - seeking another cash injection

Nicholas Hyett | 22 March 2019 | A A A
Debenhams - seeking another cash injection

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Debenhams has announced it's seeking further borrowing facilities of £200m.

If the group successfully raises the additional funding, it will allow Debenhams to pursue further restructuring options. However, some of those options could result in the value of shares falling to zero.

The shares fell 30% following the announcement.

Separately, Sports Direct, Debenhams' largest shareholder, has offered to buy Magasin du Nord for £100m. Sports Direct said this would help with liquidity requirements, and restated its desire to place CEO Mike Ashley as a director and Chief Executive of Debenhams.

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Our view

Sports Direct has never been a quiet member of the Debenhams shareholder register. Having joined forces with other shareholders to remove Debenhams' Chairman from the board, and boot CEO Sergio Bucher off as well, Mike Ashley is now seeking to step in himself.

All pretty dramatic - but that's not surprising considering Ashley, and all other shareholders are potentially facing a total wipe-out.

The problems facing the group are immense. If extra funding can be secured, it will help keep the lights on, but it won't solve the wider issues. Falling high street footfall, and a deluge of online competition means Debenhams' department store model is fighting swiftly changing tides. In store sales continue to fall, despite heavy discounting. And those sales stickers are really hurting already fragile margins

The slowdown in online sales growth is particularly concerning, given that until recently it had been an area of strength. Bucher knows a thing or two about online shopping, having been recruited from Amazon, and uncertainty around his tenure means hopes for a stronger online business are looking increasingly forlorn.

While performance continues to disappoint, the group is scrambling to save the pennies where it can. Around 50 underperforming stores are earmarked for closure, and a new supply chain deal with a Hong Kong Specialist should help with cut costs. But we don't think this will be enough to meaningfully boost cash flows, and debts are still soaring.

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.

Ultimately the challenges facing the group are great. Amidst the challenging backdrop, forecasts continue to tumble, the group's been booted from the FTSE All-Share Index, and the shares are among the most shorted on the stock market.

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Update (7 March 2019)

Sports Direct, which has a 30% stake in Debenhams, has said it wants to remove all members, bar one, of the Debenhams board. It would then appoint CEO Mike Ashley to the run the business.

If Mr Ashley is appointed to the Debenhams board, he will step down from his current roles at Sports Direct.

Trading Statement (5 March 2019)

Although trading has improved slightly in the post-Christmas period, overall conditions remain challenging for Debenhams. Together with ongoing restructuring, this means the group no longer expects to meet market expectations for full year profits.

Further details will be given in its interim results, expected next month.

In the first half of the year, gross transaction value (GTV) and like-for-like (LFL) sales dropped 5.4% and 5.3% respectively. That reflects a slight improvement on the first 18 weeks of the financial year.

The UK, which accounts for the lion's share of revenues, underperformed the wider group, with like-for-likes down 6%, while the international business saw a 2.3% decrease.

Online sales across the period improved 2%.

Debenhams said it's on track to deliver £80m in annual cost savings going forwards. That includes the closure of around 50 stores and a sourcing partnership with Hong Kong based Li & Fung. The first new ranges from the partnership will be in store for the current season.

In addition to the £40m bridging facility secured earlier this year, the group is exploring options to restructure its balance sheet, in order to meet future funding needs.

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