Goodwill is important, if you lose it then you’re in trouble.
That’s true in life and it’s true in accounting, as Debenhams is kindly demonstrating today.
“Goodwill” on a balance sheet is the current value of a company’s future cash flows.
This morning, Debenhams wrote down the value of the goodwill it banks by £302 million. So what? So the company is stating publicly that it is not confident Debenhams will ever be as profitable as it once was.
In a sense this is unsurprising, but the goodwill impairment is very important because, along with write downs to the value of Debenhams IT systems and its stores, it has propelled the department store chain to the biggest loss in its history.
Debenhams has issued three profit warnings this year, none mentioned any pending accounting adjustment, let alone one of this enormity.
The most recent profit warning, in June, suggested the company would make a pre-tax profit of £33 million this year. This morning it posted a loss of £491 million.
Look through the accounting charges and the trading picture is broadly unchanged.
The ship isn’t sinking, it’s just listing alarmingly. Debenhams is supposed to be a year and a half into a turnaround plan. A glance at the share price tells you that investors think the company future is pretty bleak.
Debenhams is struggling because spending is moving online, footfall on the high street is declining, competition is ferocious and its rivals are discounting aggressively.
The company no longer owns any of the 166 department stores it trades from - the former private equity owners flogged most of them in 2003 - and it finds itself locked into long-term leases it can no longer afford and with more retail space than it needs in a digital world.
Debenhams pays more than £300 million a year in rent and rates, a bill that will rise by £12 million next year, a bill it’s desperate to cut.
10 of its department stores are losing money currently. Debenhams' plans to close those and 40 others “over the next 3-5 years”.
The company says it is taking “decisive steps” but it won’t say which stores it plans to shut - an uncertainty that’s unlikely to inspire 26,000 staff.
To think that the boss of Debenhams threw in a job with Amazon for this. Sergio Bucher says he has no regrets. He does have a plan: revamp product, revamp the format, revamp the brand. All perfectly sensible, the problem is that the plan isn’t obviously working.
Digital sales are growing fast but total group sales are in steady decline and debt is rising again.
This is unsustainable. Bucher has cut the dividend and halved the capital expenditure budget in an attempt to reduce costs. Offloading Magasin Du Nord - the six department stores Debenhams owns in Denmark - would help raise cash.
Debenhams isn’t bust yet, there are a few tricks left to be played, but it’s still headed in the wrong direction.