Debenhams calls in KPMG as it mulls store closures

25 September 2018 Authored by Consultancy.uk

Debenhams has tapped up advisers to consider its options, including possible store closures, as the UK high street fixture struggles to renew falling sales figures. The retailer has engaged auditing firm KPMG to help turn the store chain around, and rescue falling fortunes, just weeks after the administration and sale of House of Fraser.

Founded in the18th century as a single store in London, Debenhams has since grown to 178 locations across the UK, Ireland and Denmark. The British retail stalwart has traditionally operated under a department store format in the United Kingdom and Ireland with franchise stores in other countries, however as the retail sector in the UK in particular endures a torrid 2018, this has seen the shopping institution subjected to a spectacular fall from grace.

In January, Debenhams earmarked £10 million of savings for this financial year, and £20 million extra annually. The last year has seen the company issue a string of three profit warnings, followed by 90 job losses across Debenhams stores as part of further cost-reduction efforts. Chief Executive Officer Sergio Bucher, who is leading the shake-up, then went on to slash 320 store management roles in February. Now, the retailer is said to have identified 30 stores that can be resized – although such a scheme would be subject to landlords agreeing to rent reductions, as the news has broken that the firm engaged KPMG to help explore its options.

Debenhams calls in KPMG as it mulls store closures

The price of Debenhams shares plunged 17% after it emerged that KPMG had been drafted in to help the store consider its options. This seems largely to have been because investors expected a CVA was now a foregone conclusion, with the controversial insolvency procedure having been deployed by a number of struggling firms in 2018, as it allows them to shut under-performing shops. 

Despite speculation, Debenhams Chairman Sir Ian Cheshire insisted that the chain is not heading for insolvency, or indeed that the firm is actively embarking on a company voluntary agreement (CVA). Stating that was "simply not true", Cheshire added Debenhams is looking at "every option in the longer term… If that [a CVA] is the right thing for the company and our broader stakeholders then obviously that's an option, but the implication was we were about to do it and that... trading had somehow collapsed."

KPMG was similarly drafted in to assist House of Fraser, when the UK department store was weighing up its options. The Big Four firm eventually developed a restructuring plan which proposed a CVA and a number of store closures, however the plan was blocked by landlords angry that they would lose money from the scheme. House of Fraser eventually collapsed into administration, before being purchased by Sports Direct. If Debenhams does eventually forge ahead with plans for a CVA, it would join the ranks of a host of retailers who have resorted to the restructuring option, despite anger from landlords who have argued it would leave them out of pocket. At time of writing, this list includes New Look, Carpetright and Mothercare, among others.

Challenging market environment

Debenhams CEO Sergio Bucher said, “The market environment remains challenging and underlying trends deteriorated through the summer months. Nevertheless the product and format improvements we have tested are gaining traction and we are ready to scale up some of our strategic activity ahead of peak. Having put in place a leaner operational structure and strong leadership team, and taken action to strengthen our financial position, we are well equipped to navigate these market conditions and take advantage of any trading opportunities that emerge."

While Debenhams weighs up its future, its plans have been further complicated by becoming the subject of takeover talk. Mike Ashley, owner of Sports Direct, already owns narrowly less than 30% of Debenhams’ stock, and speculation is building that he has designs on merging the brand with the newly acquired House of Fraser. Ashley, whose swoop for House of Fraser came under fire recently for jeopardising the company’s 10,000 member pension pot, has also had to issue a denial that Sports Direct is pushing Debenhams to fail.  

The claims came after tycoon Ashley, who also owns Newcastle United Football Club, has threatened to block Debenhams’ attempt to sell its Danish department store chain Magasin du Nord. The deal could put a sorely needed £200 million cash injection into Debenhams, but without it some have alleged that the brand could be brought closer to collapse, at which point an all-out buyout from Ashley would become significantly cheaper.

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