The future of department store retailers in the UK are hanging in the balance, as John Lewis & Partners and Debenhams joins House of Fraser to face the prospect of making major changes to turn their fortunes around.
John Lewis’ pretax profit before one-off items – including its 50 department stores and home shops and 352 Waitrose stores – plunged by 98.8% in the six months to 28 July to £1.2m. This was blamed on expenses incurred by shop launches and lower property profits, as well as higher IT costs and its “Never Knowingly Undersold” price-matching strategy.
It also predicts full-year profits will be “substantially lower” than last year, as previously warned in June. The department store chain itself was hit with a £19.3m loss in the first half of the year, against a 0.8% year-on-year sales rise to £2bn.
Profit warnings
And earlier this week it emerged that rival Debenhams is working with longtime adviser KPMG to assess its options.
Pretax profit this year is expected at £33m before one-off items, with a predicted net debt position of £320m for its financial year-end.
It all means that the landlords and agents involved are already bracing themselves for a severe headache, given the increasing likelihood of widespread changes to their stores.
James Child, retail analyst at EG, says: “The traditional anchor stores for many of the UK’s leading shopping destinations and high streets is no longer as glamorous as it once was.
“Long-term leases and high rents for large anchor store units have trapped department stores to covenants from which they have struggled to extricate themselves. Combined with lofty business rates, their physical portfolios have become financial black holes.
“Big is not always best, at least not any more. A lack of flexibility has compounded many internal financial distresses.”
The worst-performing Debenhams stores
When it comes to turnaround strategies, property portfolios are almost always the first to face the chop.
Debenhams chairman Ian Cheshire has publicly spoken out against allegations it is imminently considering a company voluntary arrangement, in the footsteps of struggling retail chains such as House of Fraser, Homebase and Mothercare.
However, he admitted that further store closures were likely, as it continued to be hampered by its lengthy leases. Figures from Radius Data Exchange show that Debenhams’ 165 UK store estate spans 14.4m sq ft.
It is understood that Debenhams is renegotiating leases on 25 stores up for renewal over the next five years, and is in discussions with landlords on resizing 30 shops. The retailer, which last year said it planned to close up to 10 stores, has already shut two.
These numbers could soon increase. According to an analysis of Debenhams’ portfolio, undertaken by an adviser close to the retailer and seen by EG, 37 shops have been identified for potential downsizing.
Around 15 have been identified for either definite or potential closure, while another eight were rubber-stamped for closure at lease expiry. Meanwhile, just over 30 were criticised for “poor” standards.
Preparing to negotiate?
Patrick O’Brien, UK retail research director at analytics company GlobalData, says: “While it would seem too early to try to foist a CVA on landlords who are already seething at what they deem to be an inherently unfair process being abused by retailers, Debenhams appears to be softening them up for some form of negotiation.
“Debenhams may still be profitable and has the possibility of bringing in £200m-plus from the sale of Magasin du Nord, but its long-term performance is still going to be under huge pressure, and with it carrying £4.6bn of lease commitments, as of September 2017, both it and its landlords know that these will need to be addressed soon unless there is a marked upturn in the fortunes of the UK high street.”
Debenham’s 165 stores, in numbers
Closures (definite and potential): 14
Prospective closures upon lease expiry: 8
Potential downsizes: 38
Operating with ‘poor’ standards: 33
To be determined: 18
Stable: 54
Soaring rents
Additionally John Webber, head of business rates at Colliers International, notes that the 2017 rating revaluation would have substantially added to its real estate burden.
He estimates that the retailer has a total rateable value of nearly £149.7m, amounting to an annual rates bill of more than £76m for 2018-19.
“It’s no wonder Debenhams is looking at shutting up some stores and is trying to reduce its rent bills and even cut its store sizes in some areas,” says Webber. “As business rates are tied to rental values, it would be mad not to.”
The large question mark that dwarfs the future of Debenhams’ store estate has been compounded by Sports Direct’s chaotic AGM on 12 September, after which the House of Fraser owner denied its intentions to make a takeover bid for Debenhams, of which it owns 29.7%.
The shape of House of Fraser’s own 61-store estate has yet to be determined, after it was bought out of administration by Sports Direct last month.
Alternate uses
John Lewis is also rethinking its 50 department-store estate – which measures 7.9m sq ft, according to Radius Data Exchange – although it may not necessarily mean closures.
Sir Charlie Mayfield, chairman of the John Lewis Partnership, has reportedly said the retailer could prospectively add height to its buildings and let out space for other uses, which could include developing apartments for sale.
Perhaps bravely, the partnership has committed to invest £400m-£500m a year in improving the business. But at this rate, this capital will almost certainly be directed away from adding any new floorspace in future, beyond its new Cheltenham store and future Westfield Croydon site.
A spokesperson for John Lewis said: “Our focus is on our existing estate and as always we are constantly reviewing this. […] There may be some right-sizing, repurposing or relocating of our current estate over time, such as the projects that we are doing in Croydon.”
Either way, it is clear that landlords will need to prepare themselves for radical changes to the UK’s department store estates, which are fast approaching.
As Child points out: “Shopping habits have changed. Many entities have adapted and grown successful business models. But department stores are not among them.
“Major overhaul is needed across the board if they are to weather the storm, though it does seem like it might be too little too late.”
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