Debenhams

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Debenhams Plc
TypePublic limited company
FoundedLondon (1813)
HeadquartersLondon
Key peopleJohn Lovering, Chairman
Rob Templeman, Jamie Davis
IndustryRetailing
ProductsClothing, cosmetics, housewares
RevenueImage:Green Arrow Up Darker.svg £2,090 million GBP (2005)
Employees19,000
Websitewww.debenhams.com

Debenhams plc (LSE: DEB) is a retailer with a chain of department stores based in the United Kingdom, and franchised stores in a number of other countries. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

Contents

[edit] History

The original 'Debenham & Freebody' store was based at number 33 Wigmore Street, London. This site is still used by the company and houses its communications departments, including their Press Office.

The modern Debenhams group grew from the acquisition of department stores in towns and cities throughout the UK, through its chairman Ernest Debenham. The first of such purchases, Marshall & Snelgrove in Oxford Street, London was acquired in 1919. Later purchases included stores such as Harvey Nichols in London's Knightsbridge and Browns of Chester. Most stores retained their former identities until a unified corporate image was rolled out across the stores. It can be quite dear sometimes but the quality is good

Debenhams was listed on the London Stock Exchange in 1928 and continued to expand. In 1985 the company was acquired by the Burton group. At this point the company owned 65 stores. Debenhams demerged in 1998 and was once again listed as a separate company.

Like many companies of this type Debenhams had some hard times. In 1997, however, Belinda Earl, who had previously worked for the company, returned to become its Chief Executive. She and Spencer Hawken introduced "Designers at Debenhams" which brought a variety of well known fashion talents to the stores at affordable prices, shaking off the dated perception of the company.

The company expanded rapidly throughout the 1990s and now has a total of 140 stores in the UK and Ireland with new stores recently opened at the MetroCentre in Gateshead and Hemel Hempstead, Hertfordshire.

In 2002 the Nectar loyalty card was introduced with Debenhams as a major sponsor. This card now allows customers to collect loyalty points from a range of retailers such as Sainsbury's, BP, Beefeater and Ford amongst others. Despite some criticism, the Debenhams Account Card is still a major source of revenue for the company ensuring customer loyalty and targeted mailings.

Debenhams also offers 'Debenhams Wedding Gift Service', where couples can create their wedding gift lists, from which guests can buy. In addition to the consumer website where customers can purchase goods online, the company now offers 'Debenhams To You', a service where goods can be ordered over the telephone, either from the customer's home or through a special in-store telephone, and delivered direct to the customer.

Selected Debenhams stores offer a personal shopping service. This is a service requiring an appointment, made either over the telephone, or in store. The personal shopper is trained to look at the requirements of the individual customer and with an appeciation of current trends and broad knowledge of Debenhams product ranges advises the customer and selects items on their behalf.

The company was taken over in late 2003 by a private consortium comprising CVC Capital Partners, Texas Pacific Group, Merrill Lynch Global Private Equity and management. The company returned to the stock exchange on 4th May 2006.

Debenhams was voted 8th 'most favourably viewed brand' by 'Marketing Magazine' in 2006.

The store has been trialling a compact version called 'Desire by Debenhams' which is mainly aimed at the female market with clothing ranges by 'Designers at Debenhams' and cosmetics.

Aside from department stores, Debenhams operates a number of other divisions, including 'Debenhams Finance' (offering home, car and travel insurance and bureau de change services) and 'Debenhams Mobile' (offering mobile phones).

On 8 August 2006 it was confirmed that Debenhams is to buy 9 of the 11 Roches Stores department stores in Ireland and operate them as Debenhams.

[edit] Recent financial problems and profit warning

Debenhams was controversially acquired by Baroness retail in 2003. The previous chief executive, Belinda Earl had earned a reputed £5 million as a result of this sell off. The new owners transferred their acquisition debt to the store chain's balance sheets. The company had been steadily posting bad trading results for a while.

A controversy is now reaching a crescendo, as Europe’s top buy-out executives have been hauled in front of legislators in the UK to defend the industry as part of a parliamentary inquiry. The buy-out industry itself has tried to deflect mounting criticism by appointing Sir David Walker, formerly of Morgan Stanley, to review the industry’s transparency and implement a code of conduct for buy-out groups, replete with threats to “name and shame” transgressors.

In this heated environment, Debenhams has been seized on as a textbook case of what can go wrong in a private equity deal. “We are the whipping boys of private equity,” Rob Templeman, Mr Lovering’s fast-talking chief executive, told the Financial Times. He said bad weather, weak fashion trends and interest rate rises had hurt performance. It was not, he insisted, a fall-out from the actions he took when Debenhams was private – pointing out that the clothing market was tough for many retailers.

But one private equity veteran disagrees. “They tried to present it in the best possible light, that there was sustainability to what was being done [to Debenhams] ... But that is what the market got wrong.”

Back in 2003, when London-born Mr Templeman and his backers won a protracted battle to take control of the 103-store chain, few doubted that the retail executive would add it to his list of success stories. He had fought hard to acquire Debenhams, a company founded in 1813 when Thomas Clark and William Debenham opened a store in London’s Wigmore Street. TPG and its partners eventually paid £1.7bn – a 37 per cent premium to the pre-buy-out share price.

The deal came on the back of two successful private equity deals for Mr Templeman: Homebase and Halfords. Both were turned around quickly. The do-it-yourself chain was sold 20 months after it was bought, while the Halfords bicycle and car parts retail business was floated in even less time.

Debenhams seemed the perfect target. It had property that could be sold to raise money and strong cash flow. There was scope to squeeze suppliers and adopt more aggressive trading tactics. “The business had good management and solid growth,” recalls one private equity investor. Another buy-out executive had a different view, however. “But it was not being managed to the full potential in store growth, international expansion and through the ‘Designers at Debenhams’ fashion lines. We thought, from outside the business, we could do more.”

Handed the keys in December 2003, Mr Templeman did not wait to unveil changes. Belinda Earl quit as chief executive as new managers swept in. Sleeves rolled up, his plan was simple: to improve cash management, cut costs, increase sales and expand margins – standard operating procedure to improve the fortunes of a retail business.

One of his first tasks was to reorganise the retailer’s debt. To pay for Debenhams, the private equity backers had put up £606m in equity and £1.1bn in debt, which was put on Debenham’s balance sheet. Interest rates were at their lowest level in nearly half a century, making it easier to borrow large sums of money.

Immediately after the acquisition, Debenhams’ net debt was £1.4bn – about nine times the annual trading profit. It needed to pay down the more expensive short-term loans, so it did two things. It re-mortgaged some of the stores, which provided access to cheaper financing of about £400m of debt. Next, it raised £325m from the bond markets – in two tranches – to replace more expensive loans. This also meant that the company could pay its new owners a dividend of £130m within months of the takeover.

Mr Templeman also had to squeeze more efficiencies out of business, and he did: cash flow more than tripled from £87.7m in 2002-2003 to £286.4m in the year to August 2004. This was used to help pay down net debt, which was reduced by £537m to £856m by August 2004.

But the way he did this was controversial: in addition to cutting costs, Debenhams began slashing prices on slow-moving goods, which some critics argue did long-term harm by eroding the brand. In the first months Debenhams offloaded £30m of inventory that was sitting in warehouses by holding sales. “In our view, if stock is not selling at full price it is better for margins to reduce it during that season. If you are not selling it in June, mark it down in June. If you are selling it in January for 70-80 per cent off, you are financing that stock for six months,” says Mr Templeman.

But more frequent discounting began to affect the stores’ image. “Debenhams has moved to a ‘clear as you go’ trading strategy,” wrote Bridgewell, the investment bank, last October. This had “given the stores a more promotional feel”. Instead of an emporium, Debenhams began to feel more like a bazaar.

In 2006-07, Debenhams was holding sales 16 weeks of the year, according to information given to analysts at a store visit in June. That compares with eight weeks for Marks and Spencer, six weeks at John Lewis, its closest rival, and five to six weeks at Next.

Suppliers felt the change too. Within a month of his arrival, Mr Templeman was renegotiating contracts. He began moving payment dates – by 2005 they had gone from an average of 27 days after delivery to 60 – and demanded additional discounts from some. That helped bring about the £100m improvement in cash flow in the first year of ­ownership.

By waiting longer to be paid for goods, suppliers were providing increasing amounts of finance to Debenhams. According to the Collins Stewart’s Quest model, a business analysis tool, Debenhams had “best-in-class performance” when it came to keeping hold of money owed to suppliers. The amount it owed to suppliers went up from £60.3m in 2001 to £196m five years later.

Mr Templeman cut suppliers in order to demand better terms with a core group. It all helped operating margins, which grew 3.8 percentage points under private ownership to 15.8 per cent.

He also began to implement deep cost-cutting. In the first year, head office staff were cut by 12 per cent (in part because Debenhams closed its catalogue business). When Debenhams returned re-listed, overall headcount was down by nearly 1,000 – despite opening 17 new stores.

The savings were not painless. Senior staff started to defect. One former Debenhams executive said that the atmosphere had changed: “Their attitude was like ‘you lot at Debs’, it wasn’t like the incumbents were part of the team.” Andrea Warden, who ran the home division, left for Heal’s; Stephanie Chen, head of design, quit for BHS (she now works as head of non-clothing at River Island). Steve Lawton turned up as head of menswear at BHS. Then in 2005, Paul Marchant, Debenhams’ divisional trading director of menswear, womenswear and childrenswear, joined New Look. Debenhams did keep Michael Sharp as chief operating officer and Nigel Palmer as head of stores.

Capital expenditure for new stores fell by 39 per cent to £108 per square foot. Spending on refurbishments was cut 77 per cent to £7 per sq ft. Analysts say the lack of investment – particularly when juxtaposed with Marks and Spencer’s £80-90 per sq ft refit programme – hurt ­performance.

“The old stores are in an awful condition,” says Richard Ratner, analyst at Seymour Pierce. “In Swindon [to the west of London] the ceiling is not just filthy but the lighting is appalling too, and they are beginning to deal with that, but there must be about 60 stores in that condition.”

Mr Templeman agrees that some stores need refreshing and has put aside £150m for capital expenditure this year, against £100m in Debenhams’ final year of private ownership.

Finally, Mr Templeman raised money by selling some assets, in February 2005 raising £500m from the sale of store properties.

These measures led to impressive results. The chain was growing at a blistering pace – store openings were running at 10 a year – and had a strong and reliable cash flow to borrow against.

Then came the big payday. In the summer of 2005, the company completed a £1.9bn refinancing, paying its shareholders £900m as net debt soared to £1.87bn. In just 18 months, CVC, TPG and Merrill Lynch Private Equity had received an estimated pay-out of more than £1bn, nearly double their combined £600m investment: Debenhams was going down in history as one of Europe’s most lucrative buy-outs.

That autumn, the focus began to shift to exiting the deal. Investment bankers began ringing, telling Debenhams that the IPO window was “pretty good”. The retailer was on song. In the year to September, it had broken the £2bn sales barrier and more than doubled profits. After a good Christmas, Debenhams appointed Citi, Merrill Lynch, Credit Suisse and Morgan Stanley – the four banks that arranged the £1.9bn refinancing – to look at “strategic options”. Within two weeks Citi and Merrill were appointed joint co-ordinators for a flotation and began writing a draft prospectus.

But the strains in the fabric were appearing even as Debenhams embarked on its roadshow. Privately, investors were seeking assurances that Mr Templeman was staying on. And while it was never put in the flotation document, the executive directors promised to stay on for at least three years (confirmation of which was contained in supporting documentation).

“We did look for an assurance at the float that he would stick around,” says one investor. The float succeeded – but only just. At 195p a share, it was at the bottom of the range, valuing the business at £1.68bn. The private equity groups placed £200m in shares, retaining a 35 per cent stake.

Concern was also mounting about the operational outlook. Neil Darke, analyst at Collins Stewart, presciently published a note before the flotation warning that Debenhams might be vulnerable to market downturns. “The point is that [it is] a business denuded of capex, cost, property and working capital, having been run ‘aggressively’ post private ownership. As Homebase [another Templeman-run business] has shown, any operational wobble, be it self-inflicted or market-dictated, resonates down the P&L quite manifestly,” he wrote.

“When Homebase was sold to Argos [the UK general retailer] it was expected to make £100m of profit and it is now making £50m,” points out Tony Shiret of Credit Suisse. “The DIY market has been bad since it returned to market. As for Debenhams, the clothing market has also been difficult and the lack of flexibility on costs post private ownership has been exposed.”

The disparity between what Citi and Merrill presented in the flotation document and the reality of Debenhams’ performance since the float has been a bitter pill. “The investment bankers’ estimates on like-for-likes [sales performance excluding newly opened stores] were clearly wrong,” says one investor.

“Part of the problem is analysing companies that come out of the private equity arena. It is hard to understand pro-forma accounts and what is going on underneath.” In April, Merrill cut its profit forecast for Debenhams from £170m to £135m.

Mr Templeman is toughing it out. He remains adamant the difficulties that have beset Debenhams since it was taken public again have nothing to do with the decisions he took during its private days. “You have to keep it in perspective,” he insists. “We have had one bad season – are we fixing it? Yes.”

Those involved in the deal also argue that the department store chain has a far more aggressive expansion programme, a more efficient supply chain and still has, despite the bumps along the way, a solid management team.

“We misread some of the fashion trends, particularly in menswear. These are seasonal businesses where fashion trends can change quickly,” says Philipe Costeletos, the TPG partner who worked on Debenhams. “We had three successful years during which we gained significant market share. We believe Debenhams will regain some of the lost sales over the next 12 months.”

Mr Templeman will have to spruce up his stores, sort out his products and fix his price architecture to win back customers, sales and drive the share price once more. One rival notes: “The rumour is that they are trying to establish some price integrity, but that takes a long time.”

Others suspect Mr Templeman and Mr Woodhouse would rather make an early exit by returning the business to private hands or selling to a rival operator. Baugur, which owns House of Fraser and has a stake in Debenhams, has said it has no takeover plans. Retail analysts still believe it might seek to marry the two businesses. Meanwhile, Mr Templeman has also held informal talks with KarstadtQuelle, the German department store chain, about a possible international partnership – talks that have, so far, gone nowhere.

Back in Barcelona, Mr Lovering and Jonathan Feuer, the CVC partner behind Debenhams, had stuck to their guns. They had made Debenhams more dynamic and profitable. “All the metrics indicated to us ‘chug, chug, chug’ and that it was not well run,” said Mr Feuer. “We saw ­opportunities to open a lot more stores.”

But, as one delegate quipped over champagne cocktails that evening, Mr Lovering’s side-stepping of Debenhams’ performance this year was the “elephant in the room”. Private equity justifies itself on its performance, and tends to be scathing of poorly managed companies and weak managements. With private equity under closer scrutiny, the pressure to deliver the promised results is higher than ever – and the tolerance for failure lessened.

Mr Templeman insists he did the right things – but the results to date have been mixed. Unless he can get the share price back to the flotation price, or higher, Debenhams is in danger of being held up not as an example of private equity’s success, but of its failure.

[edit] Store format

Debenhams stores are currently departmentalized as follows:

  • Health and Beauty (Cosmetics, Fragrances & Toiletries)
  • Womenswear (Designer Women's Clothing, Bridalwear & Lingerie)
  • Menswear (Men's Casual Clothing, Sportswear, Formalwear, Men's Accessories, Footwear)
  • Fashion Accessories (Handbags, Jewellery, Men's & Women's watches, Women's Footwear)
  • Young Fashion (Red Herring, Oasis, Jane Norman, Topshop etc)
  • Home (Bedding, Electrical, Furniture, Soft Furnishings, China, Lighting, Luggage & Kitchenware)
  • Children's (Children's Clothes, Accessories, Footwear & Toys)
  • Food Services (The Restaurant & Cafe Venue in most stores)
  • Wedding Services (also known as Celebration)
  • Christmas (Toys, Decorations, Noveltys, Chocolate and alcohol) (Usually opens the 1st week of October)

Debenhams stores vary greatly in size from the flagship store in Oxford Street, London to the smaller stores in locations such as Bangor. Some such stores do not have a full range of departments.

Part of Debenhams's source of business is concessions. These are 'shops-in-shops' which can be found in most Debenhams stores such as Young Fashion companies 'Oasis' and Ladieswear outlet 'Evans'.

The company's innovation has proved successful by introducing branding into its menswear and ladieswear lines. The 'Designers at Debenhams' include Jasper Conran, John Richmond, John Rocha, The Duffer of St. George and Betty Jackson.

[edit] Online shopping

Debenhams' website is run by a separate company called Debenhams Direct, which also operates their catalogue shopping service. Not all stock shown on the website will be available in any particular store, and vice versa. Orders placed in store via, for example, the Debenhams Wedding Service may be delivered in part by Debenhams and in part by Debenhams Direct.

[edit] United Kingdom

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All of the company's UK department stores currently trade as 'Debenhams', except 'Browns' in Chester (although some 'Debenhams' branding and signage does appear). Debenhams also operates an expanding number of 'Desire by Debenhams' concept stores, the first of which opened in Truro in 2004.

[edit] London

[edit] South East England

[edit] South West England

[edit] Central England

[edit] Yorkshire

[edit] North East England

[edit] North West England

[edit] Northern Ireland

[edit] Scotland

[edit] Wales

[edit] International locations

All department stores in international locations (except the Republic of Ireland) trade as 'Debenhams' name under franchise agreements. One of the franchisees 'Sogo' in Indonesia also buys Debenhams goods to sell in its own department stores (as well as operating full-line Debenhams franchise stores).

[edit] Bahrain

[edit] Cyprus

[edit] Czech Republic

[edit] Denmark

[edit] Hungary

[edit] Iceland

[edit] India

[edit] Indonesia

[edit] Kuwait

[edit] Malaysia

A Debenhams was opened at Berjaya Times Square, Kuala Lumpur. It was closed in 2006.

[edit] Philippines

[edit] Qatar

[edit] Republic of Ireland

Unlike other international locations, all Republic of Ireland stores are directly operated by Debenhams plc under the company name Debenham Retail (Ireland) Ltd. The premises of the former Roches Stores are leased from the Roche family.

[edit] Romania

[edit] Russia

[edit] Saudi Arabia

[edit] Sweden

A Debenhams was opened in central Stockholm in 2002. It was closed in January 2007 due to the difficulties of competing with the local department stores PUB and Åhléns.[1]

[edit] Turkey

[edit] United Arab Emirates

[edit] References

  1. ^ http://www.dinapengar.se/Avdelningar/Artikel.aspx?ArticleID=2006\09\07\1323

[edit] External links

Official websites:

ru:Debenhams

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