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Debenhams primed for recovery

Full-year results have failed to wow the market, but investors can take comfort in the turnaround strategy and generous dividend
October 26, 2017

Appointing Amazon’s former head of fashion as chief executive at Debenhams (DEB) has proved a canny move by the UK retailer’s board. Sergio Bucher has led a revolution in Debenhams’ online business, which sent digital sales up nearly 13 per cent in FY2017. Small improvements to the website and app helped to increase the number of sales placed online as a proportion of site visits (conversion rate). This was particularly noticeable in mobile devices, where conversion for smartphones was up 15 per cent, sparking a 57 per cent increase in orders.

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But the digital transformation is still a work in progress and second-half weakness dragged on full-year numbers, especially in the UK business which contributes 81 per cent of revenues. Gross sales before adjusting for discounts were flat in the UK at £2.35bn, but statutory revenues dropped 0.7 per cent to £1.9bn, against a 2.1 per cent rise for the group as a whole. Management blames this on a higher volume of clothes sales since Christmas, as the UK clothing market has endured heavy discounting and narrow margins due to the weakness of the pound against the dollar. As a consequence, adjusted cash profits in the UK fell by a tenth to £174m.

But Debenhams is beginning to reduce its exposure to clothing by expanding further into gift categories. The amount of ‘own bought’ (ie, non-gift) sales reduced from 77 per cent to 75 per cent in the reported period. Although this is likely to dilute gross margins slightly, it should help to reduce the level of discounting. Prior to these results, broker Investec was confident about a return to revenue growth in the 2017-18 accounting year, although pre-tax profits are expected to remain under pressure for at least another year.

Currency movements have given the international business a helping hand during the period. The 9.5 per cent reported revenue rise was largely the result of strong euro and Danish kroner exchange rates, while difficult trading conditions in Denmark and Ireland sent like-for-like gross sales down 1 per cent. That said, there is a lot to like in the international business that has been stripped back to help increase margins. International adjusted cash profits rose 8 per cent to £43m.

DEBENHAMS (DEB)   
ORD PRICE:46pMARKET VALUE:£565m
TOUCH:45.8-46p12-MONTH HIGH:59pLOW: 40p
DIVIDEND YIELD:7.4%PE RATIO:12
NET ASSET VALUE:75p*NET DEBT:30%
Year to 2 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20132.281399.23.40
20142.311067.13.40
20152.321147.63.40
2016**2.341067.03.425
20172.34594.03.425
% change-0.3-44-43nil
Ex-div:7 Dec   
Payment:20 Jan   
*Includes intangible assets of £992m, or 81p a share   **53 weeks to 3 Sep