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Debenhams - Full year results, with more initiatives announced

George Salmon | 26 October 2017 | A A A
Debenhams - Full year results, with more initiatives announced

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Gross transaction value rose 2% to £3bn, but underlying operating profit fell 15.1% to £107.5m, as margins suffered from higher costs and a changing mix towards the lower margin beauty, gifting and concession categories. This is also before accounting for the £36.2m of one-off costs to implement the CEO's 'Debenhams Redesigned' strategy. The shares fell 2.7% on the news.

The full year dividend is held flat at 3.425p per share.

Our view

New CEO Sergio Bucher's strategy is pretty much what you'd expect from someone who joined from Amazon. Building up Debenhams' online presence is a clear priority for the new man.

This is one area Debenhams has made decent progress recently. The group has responded well to the UK consumer's changing shopping habits, and invested swiftly and effectively to improve its digital presence. The net result is around £1 in every £6 of revenue now comes from online purchases.

However, while Mr Bucher will be pleased to see online moving in the right direction, Debenhams has some long-standing issues to overcome.

The group has been struggling to shift its reputation as a serial discounter, and too many shops are looking tired and cluttered. Consequently, in-store sales are going backwards.

The group is trying to negotiate with landlords, but at the moment closing more than a handful of stores looks costly. Considering the group is lumbered with such an inflexible estate, giving the shops a refresh and tacking on new social features like restaurants and gyms is probably the best available option.

However, investors should nonetheless remember that it's one thing to diagnose the disease and quite another to successfully apply the cure. The tie-up between browsing for cardigans and pumping iron isn't a natural one.

The challenges facing the group look all the more acute in the current environment. Growth in sales volumes nationally has been weaker this summer than at any point in the last four years. Add in the higher costs associated with weaker sterling (35% of sourcing costs are in dollars or dollar-linked currencies) and it's easy to see the extent of the job facing the new CEO.

These challenges mean the stock is anything but highly rated, trading at 8.1 times expected earnings. However, the dividend looks to be stable enough in the short-term, so the prospective yield of 6.6% could be attractive for investors who are willing to give Mr Bucher a chance to turn things around.

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Full year results

After stripping out the beneficial foreign exchange movements that boosted the group's overseas sales, like-for-like (LFL) sales dipped 0.2%. At the half year stage, this figure was just the other side of zero, meaning Debenhams had a weaker second half.

Gross transaction value in the UK was broadly level on the year at £2.4bn, as declining LFLs in-store were offset by rising digital sales. Total online sales rose 12.7% to £473m. Weaker margins and a higher depreciation costs meant operating profit fell 22% to £74m.

In Debenhams' International business, which generated GTV of £604m, like-for-like sales dipped marginally at constant exchange rates. The largest contributor to international performance is the Magasin du Nord network in Denmark, which had a 'resilient year against a weaker market background'. Reported operating profit increased 5.7% to £33.5m, boosted by weaker sterling.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.