The recent history of the UK's retail industry is familiar enough. Encouraged by a boom in consumer credit, many retailers expanded rapidly throughout the 1990s and the early years of the new millennium, only to find themselves overburdened with too many shops when recession struck. Consumers reined in spending, while the growth of online shopping and the creep of supermarkets into non-food retailing exacerbated the financial pressure on those in the high street.
- Debt overhang easing
- Scope for more UK stores and modernisations
- Online investment driving international growth
- Differentiated product ranges
- Difficult retail environment
- Disruption from store modernisation
With its enormous debt hangover from its days under private equity ownership, these pressures could have brought down Debenhams. When the company floated in 2006, its debt stood at £1bn and there was concern this could have overwhelmed it if trading deteriorated.
Luckily, Debenhams' private equity owners, keen to milk the business for cash, did not join the high-street land grab. In fact, the department store chain is now in the unusual position of having too few stores in the UK rather than too many. Its estate of 164 stores in the UK and Ireland is significantly smaller than those of rivals such as Next and Marks & Spencer, and the company's bosses say the market could support 240 shops. Already 14 new stores are in the planning stages. They would add 660,000 sq ft of space, with a further 25 sites identified. With new stores opening at the rate of two or three a year, it will take time for this to boost the company's financial performance. But it's a big step up over the long term, and part of the growth story that differentiates Debenhams from its rivals.
Management is also focusing on upgrading existing stores. All 45 of Debenhams' core stores will be refurbished over the next two years; 14 have been completed so far. Refurbishments have generated an average sales uplift of around 6 per cent and a 15 per cent return on capital. Equally important, City analysts think the makeovers could deliver "a step change in brand image", which could mean significant sales improvement in further years, too. That said, the disruption from having 20 store refits simultaneously on the go during this year's second half will have some impact on sales.
That should be partially offset by the growing propensity of Debenhams' customers to shop online. Since 2008, web revenues have risen from just 2 per cent of group gross transaction value to around 10 per cent. That's higher than Marks & Spencer and means Debenhams is now the seventh largest online fashion retailer in the UK. Online sales continue to grow fast - up 35 per cent in the first half of this year.
| IC TIP RATING: | |
| Tip style: | Growth |
| Risk rating: | Medium |
| Timescale: | Long term |
DEBENHAMS (DEB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 94p | MARKET VALUE: | £1.19bn | |
| TOUCH: | 93.5-94p | 12-MONTH HIGH: | 96p | LOW: 50p |
| DIVIDEND YIELD: | 3.7% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 56p | NET DEBT: | 43% | |
| Year to 31 Aug | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 1.92 | 121 | 10.0 | nil |
| 2010 | 2.12 | 140 | 7.5 | nil |
| 2011 | 2.21 | 160 | 9.1 | 3.0 |
| 2012* | 2.18 | 157 | 9.2 | 3.1 |
| 2013* | 2.24 | 170 | 10.5 | 3.5 |
| % change | +2 | +9 | +14 | +13 |
Normal market size: 30,000 Matched bargain trading Beta: 1.03 *Investec Securities forecasts | ||||
The development of its online infrastructure is also key to its international ambitions. Debenhams hopes to double online sales to £500m in the medium term, and expects a fifth of this to come from overseas customers.
Meanwhile, growing international recognition of its brand is attracting franchisees to open stores around the world. Debenhams already has 67 franchise stores in 25 countries generating around £100m in annual transactions, and plans to double this within four years. Because Debenhams has invested heavily in developing exclusive 'own-bought' ranges - which account for 80 per cent of UK sales and have been key to the steady improvement in gross profit margins - it should easily attract new partners. It's also steadily increasing the proportion of own-bought ranges at Magasin du Nord, the Danish department store chain it acquired in 2009.
It's in good financial shape to deliver such improvements, too. Net debt has fallen by £650m in three years. True, half of that came from a rights issue in mid-2009, but the other half came from trading. That also means returns to shareholders are now likely to rise, too. In addition to resuming dividend payments, Debenhams has also commenced a share buy-back programme. It plans to buy back £20m-worth of shares in the second half, and double that amount in each of the next two years.
