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Is Debenhams' public listing the cause of its woes?

Published: 09:29 09 Oct 2018 EDT

Debenhams store
The analyst said the struggling department store had seen its free cash flow "completely swallowed by dividend payments"

A City analyst has told Proactive that one of the reasons department store chain Debenhams PLC (LON:DEB) is struggling to maintain its business amidst the recent downturn in high street retail is its obligation to public shareholders, who often baulk at the prospect of dividend cuts thus depriving the company of much-needed cash.

While being a publicly traded retailer is not always a detriment, in the case of Debenhams, the analyst says its public listing has “had a negative impact” on its ability to turn its fortunes around.

Luxury department stores continue to shine

“[Debenhams'] free cash flow has been completely swallowed by dividend payments … they haven’t been able to invest in their web functionality or delivery options and have fallen behind the pack.”

“Management doesn’t want to come in and immediately cut the dividend” they add, although this is sometimes the best course of action for struggling retailers to invest in their growth channels, something companies like House of Fraser and Debenhams have been unable to do.

However, things seem to be going well for the high-end department stores, who recently have stood in stark contrast to their cheaper rivals.

This week, Knightsbridge-based Harrods reported that sales had topped £2bn for the second year running while its pre-tax profits rose 9% compared to last year.

Selfridges too has been standing out from the pack by posting record operating profits of £181mln for the latest financial year as sales jumped 11.5%.

READ: Selfridges posts record profits despite high street downturn hitting Debenhams and House of Fraser

The analyst says that one of the reasons for the disparity between these high-end department stores and those in the ‘middle of the road’ like Debenhams is that the rise of purely online players such as ASOS PLC (LON:ASC) have left the middle ground retailers “materially weak” in their offering.

By contrast, online retailers tend to focus less on the premium market, thus allowing the higher end stores to resist their influence.

“The middle market department stores used to have a competitive advantage because they provided the highest level of convenience, you could shop in one store for all the products, but with online you can do that all from your home.”

Primark eats away at discount market

At the other end of the scale is discount clothing chain Primark, owned by FTSE 100 firm Associated British Foods PLC (LON:ABF), which despite not being a “classic” department store, has also bucked the trend of a weakening high street.

In a trading update in September, ABF said it expected Primark’s sales to rise 5.5% for the full year as cash-strapped shoppers are enticed into its stores.

READ: Primark owner AB Foods warns of currency hit to profits but maintains guidance

The analyst says the trend with Primark is similar to that seen in the supermarket sector, with discounters Aldi and Lidl taking market share from the ‘big four’ supermarkets.

“You’ve got retailers at either end of the market performing well, with those in the middle being swept up by online aggregators”.

In mid-afternoon trading Tuesday, Debenhams shares were down 2.3% at 9.2p.

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