More bad news for Debenhams

Things have been going from bad to worse for Debenhams in recent months, as pressure on bricks and mortar businesses continues to grow.

The retailer has recently announced that they will be looking to close up to 50 of their stores; the downward transitional phase following the 2017 revaluation has further highlighted the company’s vulnerabilities, according to Colliers International’s report.

Although this is not necessarily a surprising announcement in the current economic climate, David Birne – business recovery and insolvency partner at H W Fisher & Company – has pointed out that this “suggests [Debenhams] has done a pretty good job of keeping the reality of its dire financial situation from [the] market.

“[Nonetheless], the circumstances Debenhams found itself in, having issued three profit warnings this year already, made structuring inevitable. The only question was which route the chain would go down.”

The Colliers report stated: “The retailer had already announced it had called in KPMG restructuring specialists to help negotiate reduced rents for its sites and close unprofitable shop.”

Debenhams has reported a £491.5m statutory pre-tax loss for the year ending 1 September 2018. This is down from the £59m profit from the previous year; the underlying profit before tax has more than halved, with a drop of 65.1% to £33.2m.

The Colliers report continued: “Business rates were not the only factor in Debenham’s difficulties – the store has cited it took a hit because of a £12.3m investment in the Debenhams Redesigned strategy, and £512.4m of exceptional write-downs relating to impairment of historic goodwill relating to the private equity transaction in 2003, store impairment, and IT systems.”

Birne, from H W Fisher & Company, has argued that “store closures were almost a given after the department store had its credit downgraded by Moody’s. And suppliers, naturally, had become increasingly nervous about extending too much credit to Debenhams, given their own indemnity insurance credit limits were being reduced in response to that downgrade.

“That was bound to squeeze Debenhams’ cash flow, while poor summer trading, rents, business rates, and staffing costs were already piling on pressure. Ultimately, by negotiating rent reductions with its landlords, Debenhams has pulled off the near impossible. But questions remain about differences, in the short-term, that will make to the credit insurers that indemnify Debenhams’ suppliers.”

It is undeniable that business rates will be playing a huge part in Debenhams’ decision as to which stores to save and which to consider closing.

The research that has been carried out by Colliers has identified the fact that most of the retailer’s stores have been paying considerably more in business rates than they should, and this is because of “the onerous effects of [the] downward phasing of rates bills, following the 2017 Rating Revaluation.”

Two of the most notable examples Colliers International has highlighted are the Stockport and Oldham stores. Stockport has had a 33% reduction in rateable value, following a revaluation, and Oldham 21%; they have paid £330,000 (instead of £219,000) and £277,600 (instead of £196,400) respectively. Over the next four years, Debenhams Stockport can expect to be paying a further £359,000 in rates bills more than it should be, and Debenhams Oldham will be paying an extra £250,000.

John Webber, head of business rates at Colliers International, said: “And these are only two examples. When you add up the bills across the country you can see what a massive impact downward phasing has and will continue to have – and the impact on thousands of jobs, too.”

After having analysed the rates bills of 46 of the “hardest hit” Debenhams stores, Colliers has calculated that the retailer will be paying £6.4m more in business rates over the next three years.

“It is no wonder Debenhams is looking at shutting up to 50 stores and trying to reduce its rent bills or cut store sizes in some areas,” Webber has said. “As business rates are tied to rental values, it would be mad not to.”

Colliers International’s Business Rates Manifesto calls for the immediate removal of downward phasing. The idea of this would be to enable rate payers to pay their true rates liabilities now, rather than waiting four years to do so.

Although the chancellor has alluded to looking into this issue in the upcoming Autumn Budget, John Webber does not believe this will actually be included.

He continued: “Retailers and other businesses have been announcing closures of stores and redundancies since the beginning of the year and even before, and many plans are now underway.

“Sadly, this is most likely to impact on the most economically vulnerable areas of the UK, which just can’t afford to be paying artificially high rates bills.

“What we need is a radical overhaul of the whole business rates regime, but I’m afraid that may well be put in the ‘too difficult’ box, given the current preoccupation with Brexit.”

David Birne from H W Fisher & Company concluded: “Debenhams will surely not be the last big retailer to find itself in this situation. Unless it ups its game in terms of online engagement with consumers, it may well just be delaying its demise.”