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Don't count Debenhams out as new boss beds in

The high street chain hasn't updated investors on its grand plan, but the market seems to be willing to wait for now
October 27, 2016

Shares in high street chain Debenhams (DEB) rose 3 per cent on the back of a largely unsurprising set of annual results from the group. This was a case of 'no news is good news'. Incoming chief executive Sergio Bucher isn't due to update investors on his strategic vision until early next year, but investors seem to have accepted this timeframe. Crucially, Debenhams remains fully hedged at $1.50 for the 2017 financial year, affording some protection to margins.

IC TIP: Buy at 55.3p

For the year ended 3 September, like-for-like sales rose 0.6 per cent as online revenue surged ahead, although a depressed clothing market held back progress during the second half. Gross transaction values also rose around 1.3 per cent to £2.9bn. Margins only fell around 10 basis points - better than expected - thanks to reduced promotional activity, although a higher proportion of lower-margin beauty, gift and concession sales as part of the overall mix offset this. This year, margins are expected to fluctuate up or down by 25 basis points as further efforts to reduce markdowns battle against this change in sales mix.

Although the mix isn't advantageous right now, the strategy is consistent with Debenhams' long-term aim to refocus the business away from the clothing market. Multiple clothing retailers have struggled this year as unexpected weather patterns, higher sourcing costs and competition from online rivals have impinged on growth. For now, the group is trying to focus on several self-help measures, including better stock management and improvements to the supply chain. A new sourcing office opened in Shanghai in August should help facilitate Debenhams' international expansion, too.

The group has also made progress on paying down its debt thanks to healthy levels of cash generation. Current net debt-to-cash profit ratios stand at 1.2 times compared with 1.3 times this time last year.

Analysts at Peel Hunt expect pre-tax profit of £120m for the year ending August 2017, giving EPS of 7.8p, compared with £114m and 7.5p in FY2016.

DEBENHAMS (DEB)
ORD PRICE:55.3pMARKET VALUE:£679m
TOUCH:55.2-55.4p12-MONTH HIGH:90pLOW: 51p
DIVIDEND YIELD:6.2%PE RATIO:8
NET ASSET VALUE:72p*NET DEBT:32%

Year to 3 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20122.231589.83.30
20132.281399.23.40
20142.311067.13.40
20152.321147.63.40
2016**2.341067.03.425
% change+1-7-8+1

Ex-div: 8 Dec

Payment: 24 Jan

*Includes intangible assets of £962m or 78p a share **53 week period