I’ve been unsure for some time whether Debenhams (LSE: DEB) should be seen as just a struggling high-street retailer to be avoided, or a recovery candidate with a viable turnaround strategy in the works. A share price plunge of nearly 20% on Monday seems to have settled that, after weekend news that the firm has called in KPMG to assess its options.
Speculation is already being aired that Mike Ashley, who recently bought up failing rival House of Fraser and who already holds a stake of almost 30% in Debenhams, might be set to step in.
Debenhams has been struggling with the near-crippling retail crisis that has seen a number of names disappearing from our streets — like Maplin and Toys ‘R’ Us, to name two big ones. Could Debenhams really be going the same way? Well, rival Marks & Spencer has been having trouble too and is set to close around 100 stores, so it’s far from unthinkable.
Profit warnings
With high-street footfall declining and millions of us turning the online shopping instead, Debenhams has already issued three profit warnings this year. As a result, the company has been cutting jobs, and embarked on a recovery strategy to try to turn things around. Part of the latter is to get more big-name outlets in store, like Nando’s and Costa, and that has apparently been successful in trials so far.
But a full recovery, if it’s achievable, could take some time and cost-cutting seems key to survival right now.
Getting KPMG in on the act doesn’t necessarily mean the company is considering liquidation, but a company voluntary arrangement (CVA) appears to be one of the options under consideration. What that should do is provide a bit of breathing space to try to renegotiate debts, store rents, etc, but it could also lead to the closure of poorly-performing stores.
Debenhams has been a disaster for investors since the company floated in 2006. That timing was unfortunate, just ahead of a decade that saw the financial crisis, followed by Brexit turmoil, and one of the longest periods of pressure on spending for a lifetime.
Price crash
Since that flotation, Debenhams shares have lost almost 95% of their value, trading at a shade under 11p as I write. But, with a recovery strategy in place and KPMG set to offer its help, does this look like an opportunity for those who poo-poo the naysayers to get in and profit from the recovery that might come?
After all, we’re looking at a forward P/E multiple of a mere 4.6 based on current forecasts, with a dividend yield now approaching 6.4%. And, despite the doom and gloom, most of Debenhams’ stores are not loss-making.
But that dividend yield only looks good thanks to the plummeting share price. The 0.7p per share forecast for this year would be slashed from the 3.42p paid in 2017 — which begs the question of why it took so long to stop handing out cash the company couldn’t afford.
And, as my colleague Edward Sheldon pointed out recently, Debenhams is the target of some serious shorting by institutional investors. While I do see a decent chance of Debenhams surviving, it’s not where any of my money would go right now.