Shares in troubled department store Debenhams (DEB) are down another 6.3% to 13.78p on Monday. Investors have been further unnerved by a weekend media report that said insurers had cut cover for the retailer’s suppliers.
This is yet another unwelcome issue for the structurally-challenged British brand, facing a highly uncertain turnaround and which has posted three profit warnings in 2018 to date.
CASH CRUNCH CONCERNS
The Sunday Times reported that Debenhams, trying to turn around its fortunes under CEO Sergio Bucher, whose hands are tied by an alarming rent bill, was facing ‘a cash crunch’ as some credit insurers had tightened their terms for Debenhams’ suppliers.
Credit insurance is used by suppliers to cover them from the risk of not being paid. When insurance firms reduce or withdraw it altogether, it shows they are concerned about the ability of their customers to pay their debts. If credit insurance is not available, suppliers can demand payment up front, which places extra strain on the retailer’s cash position and can jeopardise its ability to stock stores.
One major credit insurer, Euler Hermes, is understood to have reduced the amount of credit insurance it will provide to Debenhams’ suppliers for orders for the new season. In addition, some new suppliers are believed to have found it difficult to get credit insurance for Debenhams’ orders.
WHAT IS DEBENHAMS’ SAYING?
Here’s the embattled retailer’s response:
‘Debenhams has a healthy balance sheet and cash position. All the credit insurers continue to provide cover to our suppliers and we maintain a constructive relationship with them. It is well-documented that market conditions are challenging, but Debenhams continues to be profitable, has a clear strategy in place and is taking decisive actions to strengthen the business.'
Debenhams’ public relations adviser stresses the retailer is still a profitable and healthy business and that credit insurance has been reduced, not withdrawn, as it has with a number of other retailers.
Russ Mould, investment director at AJ Bell, comments:
‘Reports in The Sunday Times newspaper that suppliers to Debenhams are seeing tightened terms from credit insurers have eerie echoes of previous retail failures like Woolworths and HMV which both experienced similar issues ahead of their respective collapses.
‘Suppliers need this insurance as it protects them against the risk of a customer going out of business in the time between an order being made and payment being received. Without it they might demand payment up front, resulting in onerous cash demands for the customer in question.'
PROFITS UNDER PRESSURE
In its latest earnings alert, Debenhams downgraded full year 2018 pre-tax profit (PBT) guidance to a £35m-to-£40m range, down materially from the prevailing £50.3m PBT consensus and also massaged down gross margin expectations.
Trading in May and early June proved disappointing against a backdrop of increased competitor discounting, a reference to the likes of House of Fraser, and weakness in key markets, with like-for-like sales down 2.2% in the third quarter to 16 June.
At the time, Debenhams insisted: ‘We are driving out further cost opportunities beyond those already announced, focusing on self-help and prioritising cash generation. We anticipate year end net debt will be in line with our previous guidance, at circa £320m, retaining significant headroom on our £520m facilities.'
Last month, Liberum Capital reiterated its ‘sell’ rating and cut its price target from 15p to 10p, writing:
‘Continued weak trading has led Debenhams to issue a 25% profit warning. This comes on top of the already 50% cut to our estimates over the last 12 months and highlights the ongoing structural pressures that we do not expect to abate.
'Management is seeking further cost savings and will now materially reduce capex next year. While this may give balance sheet protection it is unlikely to help close the gap versus the competition. We continue to see Debenhams as a value trap.'
