Debenhams eyes options as shares take a tumble

Debenhams issued another profit warning as it thrashes out a restructuring deal with landlords, local authorities, and creditors which will lead to it closing at least 50 stores.

Debenhams eyes options as shares take a tumble

Debenhams issued another profit warning as it thrashes out a restructuring deal with landlords, local authorities, and creditors which will lead to it closing at least 50 stores.

Shares in Debenhams, which has struggled to keep pace with consumers moving online, fell sharply after it said it was no longer on track to hit an annual profit target of £8.2m (€9.5m) set in January.

“We are making good progress with our stakeholder discussions to put the business on a firm footing for the future. We still expect that this process will lead to around 50 stores closing in the medium term,” said chief executive Sergio Bucher.

The firm, which trades out of around 240 stores, of which 16 are in the Republic and the North, has turned down an offer of a cash injection from Mike Ashley’s Sports Direct, which is its main shareholder with nearly 30%.

Sports Direct bought department store chain House of Fraser out of administration for £90m last year and analysts have suggested Mr Ashley might want to put the two department store groups together.

Debenhams last month secured £40m in extra funding from some lenders. It said talks with stakeholders had progressed to include options to restructure its balance sheet to address its future funding requirements.

The company’s net debt stood at £321.3m at September 1, nearly nine times its stock market valuation of £39.2m.

It also said its annualised £80m cost-saving programme was on track. However, it said the restructuring was likely to be disruptive to its business over the coming months and blamed a 5.3% fall in like-for-like sales in the first half on weaker retail spending and higher financing costs.

The result was also an improvement from the 5.7% drop in the first 18 weeks of the financial year, while Debenhams said its gross transaction value fell 5.4%, also an improvement over the earlier 5.6% decline.

Debenhams’ shares, which have lost more than 90% since the start of 2018, were down at one stage by over 12%. The shares closed 3% lower as analysts were looking beyond its results.

“The real story is when the group will launch a CVA (company voluntary arrangement), equity raise, and restructuring plan,” wrote Peel Hunt analysts, who rate the share a sell.

A CVA would allow the group to accelerate store closures and cut its rent bill.

Debenhams said it will provide a further update in its interim results announcement, but has so far not provided a date. Peel Hunt expects an announcement by the end of April.

The latest warning from the middle-market department store chain adds to the gloom on the UK’s shopping streets, as shoppers buy more online while keeping a tighter hold on their wallets with Brexit looming.

In addition to higher financing costs, Debenhams blamed “macroeconomic uncertainties”.

Options for Debenhams could include steps like a debt-for-equity swap, a shareholder rights issue, or a CVA. “The most likely outcome, in our view, remains a CVA to shed the underperforming stores in the most efficient manner,” said Citi analyst Adam Cochrane in a note.

Reuters and Bloomberg

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