What went wrong for Debenhams and how can the department store chain turn things around?

The 200-year-old high street favourite is saddled with long, expensive leases and its chief executive has said stores are 'tired'

Debenhams’ share price crashed a further 10 per cent on Monday as the struggling retailer revealed it had brought in KPMG to try and turn things around.

The company’s valuation has collapsed an astonishing 95 per cent since it floated on the stock market in 2006.

After three profit warnings and hundreds of job cuts this year, bringing in the advisors appears to be the last throw of the dice, but how has the 200-year-old department store chain got to this point?

Chief executive Sergio Bucher euphemistically blamed a “challenging environment”, meaning consumers are not spending much, and more of the money they do spend has gone online.

But problems at Debenhams run deeper. The plight of one of the UK high street’s best-known brands is indicative of some of the ills affecting the UK economy over the last fifteen years.

Debenhams' problems can be traced back to a deal to take the company private in 2003 when a consortium of private equity houses led by chief executive Rob Templeman and made up of Texas Pacific Group, CVC and Merrill Lynch Private Equity bought the company.

They invested £600m with the rest of the £1.8bn deal financed by new debt.

Short-term thinking, a lack of investment and a huge amount of borrowing allowed the financiers to make off with bumper profits while the business was left with £1.2bn of debt. That left it particularly ill-equipped to tackle the huge upheavals faced by retailers in the post-crisis era.

In the face of poor wage growth and seismic shifts in the way people shop, Debenhams has not been able to invest and adapt as it needed to.

At the time of the deal, Debenhams had just opened its largest store, a 19,000 square-metre unit at the new Bull Ring shopping centre in Birmingham.

Its private equity buyers slashed costs and sold off freehold property while opening new stores to boost profits (and juice their returns) before floating the company less than three years later.

Spending on refurbishments was cut by 77 per cent to £7 per square foot, less than a tenth of what Marks & Spencer was spending at the time.

The consortium offloaded Debenhams at roughly the same £1.7bn valuation they bought it for, having extracted more than £1.3bn from the company.

Templeman shared a £57m payday with chairman John Lovering and finance director Chris Woodhouse by selling a third of their respective stakes.

​Templeman, a “buyout specialist”, had repeated a trick that saw him pocket a reported £20m by leading the management team that bought out Homebase in 2002. He also earned millions from a private equity deal for Halfords.

Even before Debenhams floated, the problems were already beginning to show as the company missed sales and profits forecasts.

Bryan Roberts, an analyst at Planet Retail, summed it up neatly and brutally in 2007 after Debenhams issued its third profit warning since floating less than a year earlier: “It was successful compared to its peers when it was on the market the first time round.

“But when it exited private equity, it was swaddled with debt, its property had been sold and its performance was dismal.“

Another analyst, Richard Ratner, head of equities at Seymour Pierce, said the management team had “squeezed every penny out of Debenhams”.

Since then, the share price has sunk from over £2 to just 11.5p.

Debenhams developed a reputation for big discounts, causing customers to wait for promotions (Getty)

In that time, Debenhams has faced the whole gamut of challenges affecting all UK retailers, as well as a few issues of its own making. The most pressing of those problems is being saddled with too many stores on long, expensive leases signed during the private equity years.

Longer leases might have meant cheaper rents at the time, lowering costs and boosting short-term returns. But now that the company needs to slim down, those leases are a huge burden.

Last year, Debenhams shelled out £221m in rent, leading Hargreaves Lansdown analyst George Salmon to remark earlier this year that the company had “little more flexibility than a supertanker”.

Such large fixed costs have seriously hurt the department store’s ability to battle the existential threat posed by Amazon and other online competitors. Meanwhile, rising business rates and the minimum wage are also dragging on profits.

A further problem is Debenhams’ reputation, developed throughout the 2000s, for relying on Blue Cross discount days. The tactic boosted sales but encouraged customers to wait for promotions before buying, further squeezing the bottom line.

Lack of investment in its stores over a number of years has left its oversized estate looking tired, while its range of clothes is seen as functional rather than fashionable.

Sergio Bucher, who was brought in as chief executive from Amazon to try to reverse Debenhams’ fortunes in October 2016, admitted that shopping at the chain was often like “going on a treasure hunt” for customers.

He also conceded that Debenhams’ online experience was not as good as it could be and that its clothing range was not as good as some rivals’.

There are some positives. Debenhams only takes around 15 per cent of its sales through its website, compared to more than 35 per cent for John Lewis, suggesting there is plenty of room for growth.

It has also pushed into more "experiential" retailing, such as providing makeovers and expanding coffee shops in-store. That should help it to provide something online competitors can't match.

But the list of problems is long meaning more drastic action may well be needed to turn around this stalwart of the British high street.