Debenhams' (DEB) new chief, Sergio Butcher, former vice-president of digital behemoth Amazon, faces an uphill struggle to turn the retailer around. However, we like the plan he set out earlier this month: close poorly performing stores where possible, invest in refurbishments, add facilities and use digital technology to make the company's bulging 176-store estate more relevant to today's shoppers. We also think the relatively limited capital expenditure he feels is needed to make the improvements, coupled with efforts to shore up gross margins, means the shares' bumper dividend yield should continue to provide support. And should signs emerge that Mr Butcher is succeeding in arresting the company's long-term decline in profitability, the single-digit forecast earnings multiple provides substantial scope for a re-rating.
- New management strategy
- Gross margins relatively stable
- Attractive dividend yield
- Bargain rating
- Poor high-street data
- Inflationary pressures
Prior to the announcement of Mr Butcher's strategic review this month, there were concerns that it may involve a significant ramp-up in investment, which could put the dividend - an important component of the investment case - at risk. So there was relief that the plan involves a relatively modest increase in capital expenditure from £130m a year to £150m a year over three years to 2020. Meanwhile, the decision to close underperforming stores - 10 sites have been identified as closure prospects - will also result in £50m of exceptional costs, with around half of that being cash costs. Net debt, at less than one times cash profits, does not look challenging on the face of it, but this needs to be seen in the context of substantial long-term property rental commitments (operating leases stood at £4.6bn at the end of the last financial year).