Department Stores Realisations Limited (DEBS) Earnings Call Transcript & Summary

Good day, and welcome to the boohoo Webcast and Conference Call. At this time, I would like to turn the conference over to John Lyttle, CEO. Please go ahead.

Good morning, everybody, and thank you for joining our call this morning. I'm joined today by Carol, Neil and Alistair. Today, we're announcing a very significant transaction for the group, and we're incredibly excited about the opportunities which today's acquisition will bring to the group. It's also a step change in our strategy, which will accelerate our ambition to be the leader in fashion, and now beauty e-commerce. I will talk you through our presentation this morning, and then we'll open up the line to Q&A at the end. We'll now move on to the next slide. This morning, we are announcing the acquisition of the Debenhams brands out of administration. We now have extensive experience acquiring and integrating established brand names onto our platform. As we've done with previous acquisitions, we are just acquiring a brand name and associate IP of Debenhams' online business, which includes an extensive customer list. We have an excellent track record of integrating new brands quickly. The administrator will continue to operate the website over the next couple of months for the inventory players. And then we anticipate moving debenhams.com onto our platform to go live in just a couple of months. The strategic opportunity from this acquisition is clear. Not only are we materially increasing our target addressable market and entering new product categories like beauty at scale, but the acquisition also presents an incredibly exciting opportunity for us to launch a marketplace, which will enable the group to connect with more brands and more customers. Going forward, we will benefit from 3 new revenue streams via debenhams.com. Firstly, we will be launching our marketplace. We will be working with the existing third-party brands who sell-through debenhams.com and looking to attract new brands over time. We will also be selling our own brands through a single platform for the first time in our history. Secondly, we will be entering the beauty market by continuing to operate the current wholesale beauty, makeup and fragrance business on debenhams.com. And over time, we will look to grow the brand portfolio here also. Thirdly, we are acquiring a portfolio of brands and trademarks to add to our existing portfolio of 9 brands. From a financial perspective, we are paying GBP 55 million in cash for the acquisition. This will be funded from our existing cash reserves, which stood at GBP 387 million on 31st of December, leaving a significant remaining cash balance to support further M&A opportunities as they arise. Price paid represents a very attractive multiple. The online business generated approximately GBP 400 million of revenues in their last financial year. In terms of guidance, we will be launching the website on our platform in the next financial year. So there is no change to our revenue growth guidance for FY '21, and we anticipate modest start-up losses over the coming weeks. We are not providing guidance for FY '22 at this stage and look forward to providing further detail alongside our full year results in early May. We then move on to the next slide. I wanted to provide some color around customer shopping behavior to give context of why we are so excited about the opportunity ahead. 2020 was a challenging year in so many ways. Different stages of lockdown meant that shopping online for fashion has accelerated faster than anyone could have anticipated. Over the 4 months to the 31st of December, we grew 40%, while the online fashion market grew 26% according to Mintel. This compares to an overall decline in the U.K. apparel market of 15%. Surveys show that 55% of fashion products are now bought online, up from 33% previously. We believe that this shift is permanent. We already are a leader in fashion e-commerce and are well-placed to continue to grow share. What we're seeing alongside the shift to online is a shift in customer expectations and preferences. Convenience, speed and choice are top of customers' priorities. Instead of visiting department stores, they are looking to access brands, beauty and homeware in a convenient online location, which we are now able to offer to them through debenhams.com. Debenhams is a well-known online destination for these shoppers, far surpassing traffic from major department stores and competing with established platforms. The acquisition today means that not only will we continue to grow share through our brand's pure-play websites, but now we're looking to build share and compete with a new segment of the market through beauty and marketplace. We'll then move on to the next slide. On the next 3 slides, I'll provide some more color about how our new routes to market will work in practice. Today, the group operates 9 pure-play websites, which means each brand operates a separate website. They are high-fashion brands with a highly engaged audience, particularly on mobile and social media. We shipped to almost every country in the world from 2 fulfillment centers currently with our third going live in the next couple of months. When we relaunch debenhams.com, the website will move across to our platform. For the first time in our history, we'll be selling our brands from a single site. Debenhams' customers will be introduced to our brands, which will support further market share gains and greater brand awareness. We'll also be running a marketplace for third-party brands, benefiting from Debenhams' extensive list of existing brand relationships. This means that debenhams.com act as a shop window for brands to sell their products and tap into its large customer base. Brands will benefit from being able to leverage and brand -- the brand awareness of and traffic to the Debenhams marketplace. The boohoo group will take a commission share from the brand to list their products on the site, but it is not responsible for the fulfillment of the order, customer services or subsequent returns. As such, this is a low-risk way for the group to extend the brands and connect customers with, with minimal capital investment. The opportunity is untapped, and we're ambitious in our plans for where we can take this business. We will be looking to build on our existing brand relationships and working with the experts in this area of retail to attract new brands to the platform, and we'll be exploring its potential for new categories, including sport and homeware. We move on to the next slide now. Next, I'll talk about the beauty opportunity. Beauty is a huge market in the U.K., estimated at around GBP 12 billion, and growing online as more customers look to purchase rather than in store. Over the last few years, we've started selling some third-party and own brand beauty products to our websites. And we've been talking for some time about wanting to develop our product offering in this exciting growth area. The acquisition of Debenhams provides a fantastic opportunity to tap into this market at scale. Debenhams is a leading player in the U.K. market, coming second in market share in prestige beauty, #1 in makeup and second in skincare. We plan to continue the current wholesale business, meaning we have access to 6 million shoppers who have shopped beauty with Debenhams previously. Members of the current beauty team will be coming across to join the group to support our growth and brand relationships in this area. We will also be looking to relaunch the Beauty Club, which was a loyalty scheme, with 1.4 million members and a strong presence on some social media channels. These shoppers shop with a great frequency and have substantially higher AOVs. And so again, provide a great opportunity for the group to tap into growth in this area. We move on to the next slide now. Lastly, as well as entering the beauty market and launching our marketplace, there are multiple opportunities to accelerate the group's revenue growth. For GBP 55 million, we have acquired a top 10 U.K. retail website, which has around 300 million visitors each year, and significant brand awareness of 90%. While our initial focus is on a U.K. customer base across the group, just under half of our revenue is generated internationally. So there is opportunity to launch the marketplace in our focused international markets over time. We have unlocked new routes to market for our existing brands and have extended our existing brand portfolio by adding Debenhams' labels into our portfolio. These include Maine, Principles, Mantaray and Faith, amongst other brands and trademarks. We'll be selling these through the website, and have the option to launch their own pure-play sites, too. So just on to the next slide. So to summarize, today's acquisition is strategically significant as it represents a huge step, which accelerates our ambition to be a leader, not just in fashion e-commerce, but in new e-commerce markets, including beauty, sport and homeware. Through launching our marketplace, the opportunity to introduce brands to a large customer base is unlimited. And as we continue to grow and build awareness of our own portfolio of brands, we will grow our customer base. We expect Debenhams to remain a leader in fashion and beauty. And under our ownership, we are incredibly excited about its future potential. So thanks for listening, and now we'll open up the line for Q&A.

[Operator Instructions] And we will take our first question from Aneesha Sherman with Bernstein.

Congratulations on the deal. I have 2 quick ones, please. First is, will you be inheriting any of the existing third-party Debenhams brand relationships? Or will you be starting from scratch in building this platform? And the second question is, will your beauty offering be wholesale only? Or do you plan to also launch private label beauty products?

So in terms -- I'll take that. In terms of the third-party relationships, we'll be looking to work with the existing third-party partners who are working with debenhams.com. And obviously, we'll be starting those conversations this week and looking at our relaunch date, late spring, early summer as a target date with those third parties. In terms of beauty, we'll be -- the current beauty business is wholesale, but we'll be looking to expand the beauty business to other third-party brands, some may be wholesale, some may be more of a market base. But equally, we'll be looking to develop the in-house Debenhams and sub-brands in terms of beauty. So the existing with lots of further development in the beauty, and we're quite excited about that.

We will now take our next question from John Stevenson with Peel Hunt.

Just 2 or 3 questions from me, if I can squeeze them in, please. First one, just in terms of management bandwidth. I mean, obviously, this is quite a sizable project. In what way does the management team need to sort of expand or change in terms of controlling the sort of the Debenhams acquisition as you move forward? Second question, just in terms of beauty brands. I mean you mentioned about the on-boarding process, I think, on clothing. Are the beauty brands sort of committed to the new ownership already? Or is this a process you're going to go through over the coming weeks? And just maybe an understanding of which are the biggest beauty brands in the Debenhams beauty business. . And finally, just I don't know if you got any thoughts on which of the clothing brands might go stand-alone. I guess that would require a significantly bigger SKU count than they should deliver at the moment.

So from the management bandwidth, we've demonstrated in the last 18 months the acquisition and integration of Karen Millen, Coast, Oasis, and Warehouse. Equally, if you look at last number of years, we've grown our business. So just at the end of that first year of the IPO, just GBP 110 million turnover. And in terms of where consensus has us for this financial year, clearly sort of almost 16x that size. So as we've been going on this journey over the last few years, we've continued to add management bandwidth. And we'll continue to do so over the next 12 months where we're happy in terms of our internal ability to relaunch debenhams.com. But clearly, we will be recruiting teams to assist us, for example, beauty and the Debenhams brand. So that will all be happening in the immediate future. In terms of the beauty brands, I've demonstrated, Debenhams is a major player in the U.K. beauty market, occupying sort of top 3 places in several categories. While we'll be having those conversations with those partners to come on board, based on the position that Debenhams holds, we see those conversations will go quite positively. With regards to what are the top beauty brands, that Debenhams are stocking, it's all the usual premium brands is what I would say kind of in terms of anybody who's familiar with Debenhams. So some of those brands we currently work with across some of our brands. And obviously, we'll be entering into a much bigger beauty business now as we go forward.

Okay. Great. And just on the stand-alone point, any thoughts for initial launch of some of the brands, Maine, Principles as a stand-alone website?

Yes. Listen, we have that in our strategy. Clearly, what we want to do initially is get the marketplace launched. So all our focus at this point will go on relaunching the marketplace, as I said, late spring, early summer. But we do believe there is opportunity for stand-alone sites, for example. Some of the key brands, Faith. For example, if I choose, let's go with Principles, as you mentioned, Maine is a really good, strong brand as is Mantaray. So -- but first step is the marketplace.

We'll now take our next question from David Holmes with Bank of America.

So just a quick question. Obviously, if -- this business is different to what you've done historically. I know there's going to be start-up losses and there'll be a ramp-up period, but do you see this change in the margin profile of the group in the long term? That's my first question. Second one is just on fulfillment and distribution. I know you mentioned that on the marketplace, that's not your responsibility. But within beauty, where do you expect the fulfillment and distribution centers to lie here?

So if I take the fulfillment, and then I'll hand it over to Neil for the margin. So in terms of the fulfillment for the, let's call it, the wholesale side of the business, we spoke last week about a third site to help us with capacity in Wellingborough, and that will be coming on stream in the next couple of months. But actually, the wholesale side of Debenhams, we will fulfill from our Burnley warehouse site.

And then, it's Neil here. On the margin profile, we don't expect this to change our margin profile going forward. Initially, obviously, it's going to be a small part of the business as we build it up. But when we get to more scale with this business, I think the key things here are: one, the marketplace model can be -- can deliver the same type of EBITDA margins that we currently do deliver as a group. But we're probably way off that. But in the meantime, it won't be as proportionately a part of the business to dilute our overall margins materially. So -- but what we will do is be very clear about how that margin profile impacts the overall. But as you can see, it's going to be a small part of the business initially so it shouldn't change it much.

And we will now take our next question from Georgina Johanan with JPMorgan.

Just a couple from me, please. The first one was, you've obviously given some detail about the -- what -- or implied detail on sort of Debenhams' market share and so on. Is it possible just to share what their market share was in beauty online over the last year, please? That's my first one. And then my second question was just a reminder really. In terms of Debenhams' relationships with the beauty brand, was that for U.K. distribution only? So at the moment, should we think about this as very much been like a U.K. opportunity in beauty? Or actually, are you thinking that quite quickly you could scale that beauty opportunity up into other markets, please?

So on the market share, I think the best indication that we think was the online market share of prestige beauty was about 15% to 20% for Debenhams. That's based on the information that we looked at as part of the acquisition. And I suppose on the other one, John, may add a bit more, but it is predominantly a U.K. opportunity now, but potential to be international later.

Yes. I mean, for sure, Debenhams today is U.K. But I think that's where we can bring boohoo group and our experience. If you look at us as our business, we're pretty much 50% U.K. and 50% overseas. So we see that as an opportunity in the future. But step 1 is to kind of consolidate and launch our marketplace in the U.K.

And we will now take our next question from Geoff Ruddell with Morgan Stanley.

So just one quick question really, which is that if you do find yourself with management bandwidth issues because obviously you've got a lot to do still with your supply chain as well, which would you give greater priority, to the marketplace or the beauty business, please?

I think we wouldn't be stepping into this morning without a very confident view that we can launch our marketplace with this beauty business. So we're very, very confident when acquiring Debenhams late spring, early summer. We will be soft launching debenhams.com again as a marketplace and with a beauty business.

And which do you see as the bigger opportunity?

We see both, actually. Obviously, marketplace, we think, is a huge opportunity. But equally, beauty for us is another opportunity. We talked about GBP 12 billion beauty market and the U.K. marketplace takes us into a completely different place. So we see both opportunities as really big steps for us as a business and strategically opportunistic.

And we will now take our next question from Greg Lawless with Shore Capital.

Just then, you talked a little bit about people coming across from Debenhams in terms of beefing out some of the teams in the new verticals you're in. How many people are coming across? Just on the beauty brands, I think I've read somewhere this morning that Estée Lauder have walked away from debenhams.com. Just wanted to understand that. And kind of what are your relationships with the big brands like Clinique and CHANEL, et cetera, please?

So we're just working through the numbers at the moment in terms of people who are currently in Debenhams and who will be joining us. I mean, clearly, the beauty is a big one for us in terms of the relationships and the experience there. So we don't have definitive numbers at this point, but we've been having good conversations is what I would say. In terms of the Estée Lauder, I think that was really around the concessions in stores in terms of where they had announced about the closure of those ones but still available online.

So just to confirm, Estée Lauder is still available online to you, yes?

But when the stock is available. So the way Debenhams have been working with that is on a wholesale model, so buying stock on a weekly basis.

There's more of a -- sorry, John, to get into the weeds. It's more of a Debenhams issue than what a future relationship is what I was trying to get to.

Yes, yes. I think basically, look, I think Estée Lauder could see that, look, the store's future wasn't looking very strong. So I think it's the concessions. And I think what they announced was around the 600 jobs that, that would be lost in that basis because, obviously, they wouldn't be running it in the stores anymore.

And we will now take our next question from Anne Critchlow with Societe Generale.

Two questions from me, please. The first one, what percentage of the GBP 400 million of Debenhams' online sales were related to click and collect through Debenhams stores historically, please? And then the second question, could you just remind us of the capacity of the Wellingborough warehouse in terms of pounds, millions of net sales or where you think you'll get to on that fairly shortly?

So we -- Anne, we believe that the -- it was 20% to 25% was click-and-collect sales of online in the previous business. And the Wellingborough warehouse, we've not said how much capacity it's got in terms of net sales. But it's got now 5 million units capacity and we can expand that significantly, double that. And so plenty of capacity there to -- across our distribution network with Burnley and Sheffield and Wellingborough, we've got plenty of capacity to house these operations where we have -- where we are involved in the fulfillment.

[Operator Instructions] We will now take our next question from Charlie Muir-Sands with Exane BNP Paribas.

I have a couple of questions. The first is, can you just clarify what your intentions are with respect to supply base? And when do you anticipate having sufficient capacity if you are going to be shifting the Debenhams private labels over to your supply chain and your historic suppliers, particularly in the context of the rationalization that you're currently undertaking as well, whether you see having any possible next with respect to getting new products in under those new labels? And then the second question relates to the marketplace. Can you first of all clarify, was Debenhams running this asset-light model itself with respect to customer service and fulfillment? Or -- and also expanding on that, a lot of other kind of companies that have gone down that sort of hybrid marketplace model has quickly come to realize that actually in order to get the economics to work all parties involved and indeed to sort of maintain a high level and consistent level of customer experience and satisfaction and actually you do need to run the supply chain and the customer services. So if you're not going to do that initially, how do you ensure that those marketplace partners maintain a consistent customer experience?

So do you want to talk about the supply chain?

Yes, so I'll take the supply chain one first. So in terms of the supply chain, we'll be looking to work with the existing Debenhams supply base. But equally, we'll be looking to plug the Debenhams brands also into our Karen Millen, Coast, Oasis and Warehouse supply chain, which is obviously very different from the young fashion brands. So we'll hopefully engage with some of the current suppliers, and then we'll use some of our suppliers across our premium brands for Debenhams.

Then on the marketplace model. Absolutely, we've got to make sure that this model works through the supply chain with -- for the brands. And ultimately, that will get down to our ability on the platform to be able to grow those brands, et cetera. Don't forget here that a lot of the brands that we'll be launching will be our own brands effectively as a marketplace model, so it will be a window to the extensive product ranges of those brands. And therefore, this will give us the ability to handle that customer journey and the customer service side of things seamlessly across that. And we'll be able to use that model as well to work with other brands to make it as efficient as possible. So -- but -- and then it gets down to how much the commissions that the marketplace is taking an acceptable business model, and we'll be in a great position to be able to do that.

And we will now take our next question from Alvira Rao with Barclays.

Just a couple for me. First of all, on the marketplace side, how do you guys think about controlling the customer experience in terms of delivery, returns, things like that? Second, also on the marketplace side, can you walk us through a little bit in basic terms around the unit economics? What is the typical commission rates? How does this drop through to EBITDA, et cetera?

On the delivery return side, the principle is that the brands will be taking care of all fulfillment in terms of delivery and returns. And it's a similar type of thing to what you would see on Amazon, on Zalando, et cetera. So very similar model to that. On the unit economics, et cetera, I'm not going to go into that right now. The way Debenhams recognize revenue was they recognize revenue at the gross level. So all of those GBP 400 million gross sales stat. So both -- those are net revenues, but they're fairly close to the GMV numbers. But we -- as we establish our own relationships, we'll be able to give a bit more color on the unit economics. And then, of course, what we'll be reporting going forward are numbers at the group level on this. So that if we're selling our own brand, any commission would just be an internal thing that you wouldn't see in the external side of the numbers. So more information on the unit economics will -- to come later.

And we will now take our next question from Paul Rossington with HSBC.

Can you hear me?

There's quite a lot of interference, Paul.

Sorry, is that better? Can you hear me now? Sorry.

Just about.

Right. A quick question. When do you expect the marketplace to cannibalize existing own brand website sales strategically?

We wouldn't expect it to cannibalize our existing own brand website and more it's an extension to an additional channel for those brands. And while you may get a purchase on debenhams.com that could have up and done and say boohoo don't come on pricing. But overall, the cannibalization won't be significant is what we would expect. And overall, we'll be able to reach more customers who will try the brands than we would otherwise have done. So we wouldn't expect to see cannibalization there, although some of the customers could be similar customers. I think the audience for debenhams.com is probably a little bit older in terms of the fashion side of things. But the beauty side of things, I think there's quite a good opportunity there to get additional customers even for the younger brands that would be shopping with -- in beauty on Debenhams.

And we will now take our next question from Anubhav Malhotra with Liberum.

Just on the customer experience again. So if a customer has 6 different brands in the bucket and if we want to return 4 of them, would you be returning 4 different shipments to 4 different addresses? Or do you plan to outsource that to a single service provider, which will help to do it?

So we're looking at an outsource on that at the moment. And again, one of the things to work through. So the customer journey is and experience is really, really important in marketplace. So at the moment, the view is that we'll be looking to outsource.

We will now take our last question from [indiscernible] with RBC.

Just one question from me, please, about the long-term margin of marketplace. So given that the business is being low-risk and having asset-light model, would not margin be higher than the retail business?

It could be. And a lot of that depends on how you recognize the revenue on those sales, et cetera. As I said, before the Debenhams recognize the revenue for the entire transaction, then you'd have the cost of the sales for the transaction to get you down to what was effectively the commission rate for Debenhams. And in which case that -- then you've got, obviously, costs associated with the platform and the buying and merchandising that come off of that. But it technically could be as higher margin as our other businesses. And I think you've seen in the past that with Debenhams is I think the data shows that Debenhams' online business could be a higher-margin, double-digit EBITDA margins, et cetera. But we'll have more information on that as we know what the -- as we know what the financial metrics are associated with the different ways that we're going to be dealing with different customers. And of course, as I said before, on the fashion side, a lot of the brands that are going to be on the platform will be our own brands as well. So most of that is going to be a cut through to a similar margin to what we see today.

And that concludes today's question-and-answer session. At this time, I would like to turn the conference back to the management team for any additional or closing remarks.

So thanks, everybody, for joining us this morning. An excitement very much so in terms of our acquisition of Debenhams and another chapter on the boohoo group story. So thank you very much and speak to you all soon. Thank you, mate.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.