Debenhams has issued a fresh profits warning after a slump in UK sales, as it tries to hammer out a deal with its lenders that will include 50 store closures.
The retailer said its previous profit forecasts for the current financial year – made just two months ago – were no longer valid after a 6% slide in UK sales in the 26 weeks to 2 March and an increase in finance costs.
It comes three weeks after the department store chain secured a cash injection of £40m, giving it time to negotiate longer-term refinancing with its banks and bondholders. The rescue process is expected to involve the closure of 50 stores and lenders taking a stake in the company.
Sergio Bucher, the Debenhams chief executive, said in the trading update: “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.
“Our priority is to secure the best outcome for the business and all our stakeholders, whilst minimising the number of store closures and job losses. To do this, as we have said before, we will need the support of both landlords and local authorities to address our rents, rates and lease commitments.”
Like-for-like sales fell 5.3% in the 26 weeks to 2 March, with the UK down 6% and international sales falling 2.3%. Digital sales grew by 2%. The sales decline slowed in the last eight weeks of the period, to 4.6%.
But Debenhams said “macroeconomic uncertainties”, combined with disruption and additional finance costs caused by the need to refinance meant the firm would no longer be able to meet the full year pretax profit target of £8m stated on 10 January. The company made an underlying profit of £33.2m in the previous year.
Debenhams, which has 165 outlets and employs 25,000 people in the UK, issued three profit warnings last year as trading worsened amid Brexit uncertainty. An industry survey published on Tuesday also blamed Brexit for a fall in retail sales growth last month.
Shares in the company fell by nearly 3% to 3.10p on Tuesday, reducing its market value to just £38m.
In its battle for survival, Debenhams is considering an insolvency procedure known as a company voluntary arrangement (CVA), a route taken by other struggling high street chains including New Look, Mothercare and Carpetright.
However, CVAs can take several weeks to arrange and it is not clear if a deal can be finalised before Debenhams’ quarterly rent day in late March, when it will have to pay about £50m to landlords.
A comprehensive plan to refinance its debt is expected to involve a debt-for-equity swap, but may also include new cash from Mike Ashley’s Sports Direct, which owns close to 30% of the company.
Neil Wilson, the chief market analyst at Markets.com, said: “Debenhams is still struggling and still levered up the hilt – the only hope is restructuring of the balance sheet and some deals with landlords. Mike Ashley may well still swoop – the rationale for a tie-up with House of Fraser remains compelling.”
Debenhams said its £80m cost-saving programme was on track. The first ranges resulting from its new sourcing partnership with Li & Fung, a Hong Kong-based supply chain manager, are expected to be in stores in the current season. Debenhams hopes the partnership will enable it to respond more quickly to trends and customers’ preferences.
Sofie Willmott, a senior retail analyst at GlobalData, said Debenhams should have been able to increase its market share given the troubles at rival House of Fraser where stores were “looking empty and unloved” and so the ongoing fall in sales was disappointing.
“Although changes are being made to product ranges and the experiential element is a key focus for the retailer, it is questionable whether this will be enough to draw consumers back into Debenhams,” she said.
