More to do as Debenhams CFO moves on

THE NEW YEAR has so far been an unhappy one for high street department store Debenhams, having seen its CFO step down just days after a profit warning.

Simon Herrick has resigned from his role, and will leave the company on 7 February. His departure capped a tough week for Debenhams, after being accused of issuing a ‘Santa tax’ on its key suppliers, then issuing a profit warning.

Herrick has spent two years with the department store, having previously held roles at Northern Foods and French electricals outlet Darty.

A letter from Herrick had called on the own-brand suppliers to make a contribution – calculated at a 2.5% discount on Debenhams’ open orders – towards Debenhams’ refurbishments, according to reports. The retailer denied it was an attempt to boost its trading figures.

On 31 December it revealed an expected profit before tax of £85m for the first half of its financial year, following worse than expected Christmas trading, compared to £114.7m in the corresponding period a year earlier. Analysts had been expecting figures closer to £110m to be announced.

Equally tellingly, Debenhams’ share price fell to 72.2p from 93p in December, leaving the company worth £885.27m by market cap.

Debenhams blamed declining high street footfall, an “unprecedented level” of promotional activity, continued pressure on household incomes and the impact of unseasonal weather on clothing-related sales.

Investors, the Financial Times reports, believed Herrick had “lost credibility” after a series of problems primarily related to unexpected costs that took their toll on profits. Debenhams has in effect issued three profit warnings in 12 months.

Shares climb post-announcement

Shares rose following the announcement of his departure. That personal ignominy was softened, though, by a tidy £500,000 pay-off. But more importantly for the ailing retailer, investors said they were not convinced chief executive Michael Sharp had yet tackled all the outstanding issues.

Much soul-searching is likely to follow, with one top-ten shareholder telling the FT: “The question is how much of [it] is down to the finance director? And will Michael Sharp be able to repair [the] impact on his reputation. … Or is there a bigger problem here with credibility of management generally?”

A search to find Herrick’s replacement is underway. Neil Kennedy, director of finance, will assume the role of acting CFO on an interim basis.

It remains unclear as to whether Kennedy is likely to take on the Debenhams role more permanently to provide some continuity.

What is clear is the task ahead for the next incumbent is substantial. A move to a shiny, new central London office a Regent’s Place has, it seems, been timed poorly given recent developments.

Commentators, too, do not so much blame the present-day and recent management as they do historical; tracing the problems back the best part of the last decade.

“Having paid far too much for the company in the private equity boom of the time, its owners stripped this one-time pride of the department store sector down to the last lightbulb, leaving behind a debilitating legacy of underinvestment when it came to re-flotation in 2006,” wrote the Telegraph. That shares are today worth little more than a third of what they were then sold for gives some indication of that impact.

According to many onlookers, stabilisation is key for the next incumbent, although that may prove difficult with potential buyers House of Fraser waiting in the wings.

“This looks suspiciously like another company being dressed for sale,” the Telegraph’s Jeremy Warner cautioned.

Opposite numbers:

John Lewis’s Rachel Osborne
Unlike many of its rivals, John Lewis reported healthy Christmas sales, up 6.9% on the corresponding period the year before. Sales at its stores rose 1.2% in the five weeks to 28 December with online sales soaring almost 23%.

Marks & Spencer’s Alan Stewart
Once considered a bellwether for the economy, M&S is not so much anymore. The recent fall in its share price implies underlying or like-for-like sales of clothes and general merchandise in recent weeks have dropped at least 1.5% compared with analysts’ forecasts of just a modest drop, according to the BBC’s Robert Peston.

Stats
Debenhams December 2013 share prices
Start of the month: 93p
End of the month: 72.2p

M&S December 2013 share prices
Start of the month: 480.1p
End of the month: 432.6p