Merry Christmas from Debenhams. Ho! Ho! Ho!

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The share price of department store giant, Debenhams (LSE:DEB) was already falling, closing down more than 4.0% yesterday, when it wrecked the halls and the boughs of holly for its suppliers with a Christmas gift that it gave to itself at its suppliers’ expense. Debenhams share price has dropped another 2.2% today to 80.20 after stealing Christmas in the spirit of Dr. Seuss’ infamous Grinch.

Before I begin my tirade for the day, let me say that what Debenhams has done is not new.  It has been done by at least several companies that I am aware of over the past decade.  In a nutshell, Debenham’s – in the true spirit of the unrepentant Scrooge – has unilaterally told its suppliers that they expect an additional 2.5% discount on all items on open order.  Make no mistake – this is not a negotiation.  The suppliers have been told.  All of them.  Then, to add insult to the coal in the suppliers’ stockings, Debenhams has also told them that they (DEB) will be TAKING a 2.5% discount on all items already invoiced but yet unpaid.  Merry Christmas from the crooks Debenhams!

In effect, the latter move by the retailer is a vivid demonstration of a lack of moral ethics.  At the very least, suppliers now know that they cannot deal in good faith Debenhams.  Explained in its simplest terms, Debenhams, with all due respect to Ronnie Biggs (RIP), has pulled off the robbery of the century.  Plus, in the spirit of the season, Debenhams CFO, Simon Herrick, wrapped the company’s present to itself up in a big, fancy box, calling the theft a “contribution.”  His statement was, in fact, “As we will mutually benefit from the growth of Debenhams we are now seeking a contribution from our suppliers to support our commitment to on-going investment.”  Let me interpret that double-speak:  “Please put your money into the sack.  Business has been a little slow lately.  We can’t figure out how to make money any other way.  Thank you for your contribution.  If anyone wishes to discuss the matter further, please feel free.  Just a reminder, I am the guy holding the gun.”

I am not a prophet, but here is how I have seen these scenarios played out in the past.  The very largest of the suppliers will use their influence either to prevent the “contribution” or find a less-than-visible work around, but the less influential suppliers will have little or no alternative but to “contribute.”  By the end of the day, the larger suppliers – the ones with the biggest “contributions,” will avoid donating, when, in fact, it is the larger suppliers from whom Debenhams most needs “contributions.”  For the smaller suppliers, that 2.5% could mean the difference between a profit and or a loss for their own business. But, hey, according to CEO Michael Sharp (that name ought to have been a warning), it’s all for the greater good of Debenham’s growth.

One Debenhams spokesperson referred to the “contribution” as supporting “our commitment to ongoing investment in the business.”  Now I’m confused.  I thought investment is what shareholders do.  I don’t recall Debenhams offering shares to any of its suppliers.

One more thing before I grab a cup of caffeine to help me get a better grasp on this nefarious “contribution” concept.  If my suspicion is correct, the 2.5% on the unpaid invoices is not limited to those issued in the last 30 days.  Debenhams pays its suppliers on its own terms – 120 days to be exact.  So, everything on the suppliers’ receivables for the last four months has now been reduced by 2.5%.  Wow!

Frankly, being a supplier to Debenhams does not seem to be a really good business opportunity, unless I am a supplier with more cash than I know what to do with and operating margins a good bit beyond the norm.  The only thing I can think of that would be worse than being a Debenhams supplier would be being a Debenhams investor.

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