So What Could Mike Do For Debenhams?

Amidst the announcements of Christmas trading results Mike Ashley's Sports Direct announced that it had sold its 4.6% stake in Debenhams less than a week after acquiring it (netting a profit of £4.5m) in a move that could see them increase it to 6.7% in the future. Confused? You will be!

 

Despite eschewing most forms of publicity Michael James Wallace "Mike" Ashley is well known for liking a bet (as well as a drink and decorating his house with Christmas lights) and with a potential £64m exposure should it go bust Debenhams would seem to be his latest flutter. Now obviously I don't know what his plans are, but I'd like to share my own vision as to what he could do.

Before I do, back to that arcane derivatives deal. Sports Direct has acknowledged that it is betting with a third party about how far the shares will fall with the said (unknown) third party believing that the shares will fall further. Simon Neville from The Independent reports that "Under the deal Sports Direct is paid a fee for agreeing to buy the shares at a preset - and undisclosed - strike price in the future. If the shares fall below the strike price, it will buy a 6.7% stake in Debenhams at the agreed price, or pay the cash difference between the share and strike price. If the share price continues to rise then the deal is off and Sports Direct pockets the fee from the third party."

Clear? No? Well you're not the only one but it would take a brave person to bet against him as the self styled "Northern club" of David Hughes and Dave Whelan will tell you. It might not be the prettiest retailer to look at, but Sports Direct entered the FTSE 100 in September and is worth more than £4bn. Rather more than be said for Allsports and JJB!

The Telegraph's analysis ran as follows: "Sports Direct may well be the craziest business on the high street. Not only is it run by Mike Ashley, a pantomime villain in Newcastle, but it has publicly fallen out with one of its two biggest suppliers, employs the vast majority of its workers on zero hours contracts and has stores that resemble a jumble sale. And yet, while Sports Direct may be unconventional, it has also been hugely successful. Last year its shares rose 86% and its sales were up more than 20%. This means that now, Sports Direct is also the craziest business in the FTSE 100."

Ashley's strategy, in broad terms, has been to get customers through the doors by selling products from the brands he owns (Donnay, Lonsdale, and Dunlop Slazenger) at a cut price alongside those from Adidas and Nike.

I have read that his team benefits from his passion and enthusiasm. If he can bring this energy to Debenhams then that's the first point in his favour. There is commentary about "sharing brands" between the two businesses but I would assume that Mr Ashley's plans are bigger than this. It should not be forgotten that he has bought Flannels as a foray into the luxury market. USC then Republic, was interested in Debenhams and, I believe, Nicole Farhi.

So, in my imaginary world Mr Ashley would....

Divest the Debenhams chain of some stores and use selected others as "value" stores for his own sports brands and Debenhams own brands.

Set up no more than a dozen Debenhams stores as true upmarket Department stores to rival, and better, House of Fraser. These would house established and new affordable luxury UK and international brands. He also has the cash to support new British designer talent in a way other store groups can't. The problem with achieving all this is him himself. His relationship with suppliers is not great and prestigious brands may be wary of doing business with him.

He would need to invest in store improvements to the tired Debenhams chain, but all is not yet lost at Debenhams. Aside from my ideas above, Mike Ashley can make immediate improvements by using his extremely slick logistics function. Moving stock around and making it available has been a key to his success and this platform could improve customer experience straight away.

Debenhams needs to be "re-energised" and energy is one resource Mike Ashley has in abundance. It seems to me that he needs an expert in managing suppliers to help relationships across all of the brands in which he has a stake. This may be his Achilles heel and if he really wants to succeed in the more upmarket end of retail he needs to change people's perception of him and trust someone else to build this part of his empire.

But even if he just sorts out the Debenhams store estate and gets a new senior team on board, plus use his logistics operation, Debenhams will still benefit hugely from his involvement.

Written by Erica Vilkauls: Director JEM Retail Consultants

Who Did and Didn't do Well Over Christmas (and Why)

In Retail Winners and Losers in 2014 I made some predictions as to who would do well, and less well, this year. How are these looking in the aftermath of the critical Christmas and New Year trading period?

Department stores John Lewis and House of Fraser have emerged as two of the biggest retail winners this Christmas, but the fact that John Lewis saw its sales growth halve and House of Fraser's success came after heavy discounting showed that there is still a chill in the air even for those who appear to be doing well. Who is wrapped up warm and who is catching a cold?

NEXT: Sales up 12% on last year for the period from 1 November to 24 December. Britain's second largest clothing retailer reported sales "significantly ahead of expectations" in the run up to Christmas. The Company raised its pre-tax profit forecast for 2013 to £684 - £700m and announced a special dividend of 50p per share. Shareholders showed their appreciation by sending the share value up 10%.

The retailer has cleverly benefited from a series of self-help measures that offset any impact of the heavy discounting and reduced footfall so bemoaned by struggling rivals. They have a consistent offer with good size availability and great delivery options. A retailer that is trusted on product, quality and its management of multi-channel (I won't give my views on the product itself, apart from observing that M&S used to stock this sort of merchandise in the days when it sold clothing well). Chief Executive Lord Wolfson said that they also saw a rise in shoppers leaving their on-line sales until the last minute as confidence grew in the next-day delivery service.

John Lewis: a 7% rise in like-for-like sales in the 5 weeks to 28 December. JL was boosted by a 22.6% increase in on-line sales bringing it to almost a third of total sales over this period, but sales in stores were also up by 1.2% as shoppers snapped up last minute presents on the high street.

Shoppers have a comfortable and welcoming environment and are served (in the main) by enthusiastic and well-informed assistants. I'd be interested to know the profit number year on year as clothing is now highly dominated by Brands who discounted from early December. I was also faced with waiting 10 working days to have 2 in stock items delivered. Why? I went to AO.com and had them delivered next day. John Lewis cannot trade on reputation alone. From now on the customer must be King and established supply chains must develop or adapt or the story may well be different next Christmas. (Still think the advert was worth the cost?)

House of Fraser: Like-for-like sales for the 3 weeks to 28 December were up 7.3% with on-line sales up 57.7%. Apparently this surge in on-line sales helped HoF to have its best ever Christmas trading period, although having used the website I have to say I am amazed at this!

The store environments have improved (unlike Debenhams) and if only they did not discount so often I'm sure that more aspirational brands would stay with them. My view would be "decide who you are and stick with it". Prestigious brands do not need to discount and currently being in House of Fraser is not seen as a good option to sell through.

Debenhams: Underlying sales rose by 0.1% in the 17 weeks to 28 December despite a 27% rise in sales on-line. Gross profit margin fell by up to 1%.

We were warned that pre-tax first half profits would be 26% down on last year at £85m after hopes for a late surge in December were dashed.

My prediction last October was that Debenhams would fail in 2014 and if their current strategy of discounting continues then Debenhams will not survive as there is no point to it any more. This strategy always had a limited shelf-life and they are now neither mid-market or value.

Very odd that the CFO was chosen to fall on the proverbial sword. That seems more than unfair when a change of strategy led from the top is surely the only way forwards, although perhaps the CFO was behind the (grasping at straws) tactic of demanding that its suppliers pay a 2.5% discount just 8 days before Christmas.

It seems it's been good news for all those clothing brands with great, distinctive product who held their nerve on discounting. Next, Fat Face, Boux Avenue, JLP own brand, Zara, Reiss, Jigsaw, and Ted Baker.

Retailers can't directly affect confidence in the economy but if you have a great product and manage stock well then you are much more in charge of your own destiny. Those that really understand their customers and put their needs first will win in 2014.

Written by Erica Vilkauls: Director JEM Retail Consultants