investment report- debenhams 2014
TRANSCRIPT
“An Investment Appraisal Report of Debenhams PLC”
David Greenslade
05/22/2014
ContentsExecutive Summary……………………………………………………………………………………………………………………………i
1.0 Debenhams Plc. Overview..................................................................................................1
1.1 People.................................................................................................................................1
1.2 Products..............................................................................................................................1
1.3 Services...............................................................................................................................2
1.4 Brands.................................................................................................................................2
1.5 Strategy...............................................................................................................................3
1.6 Debenhams Current Performance Indicators.....................................................................4
2.0 UK Retail Industry...........................................................................................................................5
2.1 PESTEL Analysis of the Retail Industry................................................................................7
2.2 Porter’s 5 Forces Analysis.................................................................................................13
2.3 SWOT Analysis: Debenhams.............................................................................................16
3.0 Competitor Analysis................................................................................................................21
3.1 Marks and Spencer Group plc...........................................................................................21
3.2 NEXT plc............................................................................................................................21
3.3 Ratio Analysis....................................................................................................................22
3.3.1 Profitability....................................................................................................................22
3.3.2 Liquidity.........................................................................................................................23
3.3.3 Efficiency........................................................................................................................25
3.3.4 Gearing..........................................................................................................................27
3.3.5 Investment.....................................................................................................................28
4.0 Share Price Movement.................................................................................................................33
4.1 Summary of the UK Retail Industry Major Events over 5 Years........................................34
4.2 Summary of the Debenhams Major Events over 2013.....................................................38
4.3 Altman Z-Scores................................................................................................................41
4.4 Beta-Coefficient Scores.....................................................................................................42
5.0 Recommendations........................................................................................................................43
6.0 References.....................................................................................................................................45
7.0 Appendices....................................................................................................................................51
i
List of TablesTable 1 - Key Operating Numbers Breakdown 4
Table 2 - Key Investment Ratios Breakdown 4
Table 3 - UK Retail and the Economy 5
Table 4 - UK Retail and Employment 5
Table 5 - UK Department Store Trends 6
Table 6 - PESTEL Analysis of the Retail Industry 7
Table 7 - Porter’s Five Forces 16
Table 8 - Total Equity against Total Profit for Year Over 5 Year Period 28
Table 9 - Du Pont 3 Point Analysis (2013) 30
Table 10 - Du Pont 5 Point Analysis (2013) 31
Table 11 - Breakdown Summary of Altman Z-Scores 42
Table 12 - Breakdown Summary Beta-Coefficient Scores 42
List of FiguresFigure 1 - Debenhams Estimated Sales Mix 2
Figure 2 - 2013 Conceptual Profit Margin Comparisons 23
Figure 3 - Debenhams Share Price 5 Year Trend against Competitors 33
Figure 4 - FTSE Share Price 5 Year Trend 34
Figure 5 - Debenhams Share Price 1 Year Trend against Competitors 37
Figure 6 - FTSE Share Price 1 Year Trend 37
ii
Executive SummaryThis report provides a critical assessment of the possible investment in Debenhams PLC. The
report introduces background information on Debenhams including a SWOT analysis to provide
a solid foundation of knowledge, before analysing the current trading environment of the UK
retail environment. The results revealed that UK retailers have experienced a tough period of
trading within the last decade as a result of the recent recession, as well as the emergence of
new competitors and substitutes from the progression of internet shopping.
Next the trading performance of Debenhams was critically investigated using financial ratios
against two rival companies, NEXT PLC and Marks & Spencers PLC, and the industry average.
The figures revealed parity between the three companies in most respects when comparing
profitability, efficiency and gearing ratios; however NEXT PLC was the standout performer. The
investment ratios however were far below both the returns of their rivals, and were highly
volatile in their deviations year on year.
Despite substantial international expansion, Debenhams have failed to achieve share price
growth with their value far below both rivals. The first fall in profits in five years and two profit
warnings in 2013 have led to a lack in confidence by the market, and also changes in personnel
at Debenhams.
Looking forward, estimations using the Altman Z-Score and Beta-Coefficient raise concerns over
Debenhams future as it places within the ‘distress zone’ of possible bankruptcy and scores a
high volatility figure against overall average market stocks.
For these reasons, the decision has been made to not invest within Debenhams PLC as the
venture would encompass too high a risk in the short term to warrant the possible high rewards
in the long-term.
iii
1.0 Debenhams Plc. OverviewDebenhams is the UK’s largest department store in terms of outlet numbers and a leading
international, multi-channel brand in the store group with a proud British heritage (Mintel 2013).
The UK segment comprises 156 stores operated in the UK along with online deliveries to the UK
customers. The International segment includes 82 stores, comprising 11 Debenhams stores in the
Republic of Ireland and six Magasin du Nord stores in Denmark besides 65 international franchise
stores in various countries including Turkey, India, Kuwait, Egypt, the Czech Republic, Bahrain,
Slovakia, the UAE, Philippines, Malaysia, Iran and Jordan (Global Company Intelligence 2014).
1.1 People
The past five years has seen huge changes in Debenhams staff in top job roles that included the
resignation of John Lovering (Chairman) in 2010 with Nigel Northridge has been the Chairman of the
company since April 2010. Michael Sharp became the Chief Executive Officer and a Director of the
company since September 2011. 2011 saw the addition of Simon Herrick as Chief Financial Officer
before his subsequent resignation in early 2014 after poor trading performances. The lack of stability
in key job positions is a concern to potential long-term investment as strategies are chopped and
changed regularly heavily affecting share price movements and dividend payments.
1.2 Products
Debenhams has been investing in British design for 20 years through its exclusive Designers at
Debenhams portfolio of brands; current designers include Ted Baker, Jeff Banks, Jasper Conran and
many more. Products range from clothing ranges suitable for all ages, lingerie, home & furniture,
beauty, shoes, gifts & toys, electrical and concessionary (Debenhams Website 2014). Figure 1
provides a breakdown of Debenhams Sales Mix.
1
Figure 1: Debenhams Estimated Sales Mix (Adapted from Mintel 2014)
1.3 Services
Current services provided by Debenhams are its restaurants & cafes, personal shoppers, hairdressing
& beauty treatments, nail bars, wedding/celebration gift services and e-commerce.
1.4 Brands
The company offers a unique mix of its own exclusive brands and international brands. The
company’s strategic goal is to create sustainable value through building a leading international,
multi-channel brand through its differentiated sales mix.
2
1.5 Strategy
Debenhams strategy over the past five years has focused upon their Four Pillar values:
1. Focusing on UK retail sector
2. Delivering compelling customer proposition
3. Increasing choice and availability through multi-channel
4. Expanding the brand internationally.
3
1.6 Debenhams Current Performance IndicatorsTables 1 & 2 provide a basic overview of Debenhams’ current performance with an in-depth five year
analysis to follow later in the report.
Table 1: Key Operating Numbers Breakdown (Adapted from Hoover 2014)
Debenhams Marks and Spencer NEXT
Annual Sales $3.54B $15.23B $6.18B
Employees 30,154 81,734 54,507
Market Cap $2.10B $9.56B $16.01B
Table 2: Key Investment Ratios Breakdown (Adapted from Hoover 2014)
Debenhams Marks and Spencer
NEXT Industry Median
Market Median
Price/Sales Ratio
0.43 0.70 2.75 0.46 1.47
Price/Earnings Ratio
9.26 14.43 18.59 83.33 20.33
Price/Book Ratio
1.30 2.94 35.84 2.58 2.27
Price/Cash Flow Ratio
5.71 6.95 16.72 8.73 243.90
4
2.0 UK Retail IndustryRetail is described as a ‘large and pervasive sector’ operating in every community and touching
everyone’s lives (Gov 2013). As an extremely diverse sector, both in size and structure, meeting
consumer’s needs and strategic operations require intense scrutiny. Retail is closely linked to
multiple sectors of the economy, including manufacturing, construction, wholesalers and logistical
sectors. Retail’s importance within the UK is highlighted by Tables 3 and 4 below.
Table 3: UK Retail and the Economy (Information taken from Gov 2013)
Retail and the Economy
- In 2012 UK retail sales were £310 billion
- Retail accounts for 5% of UK Gross Value Added
- Shops account for more than a third of consumer spending
- The Retail sector pays £17.5 billion of the 4 largest taxes (VAT, Business Rates, National
Insurance and Income Tax) - 9% of the UK total
- The retail sector is a key route to market for other sectors, such as manufacturing
- The value of internet retail sales in 2012 was £29 billion, around 9% of total retail sales
- In 2012 there were 189,280 total retail enterprises in the UK - that’s 9% of all VAT-registered
businesses. Over 170,000 retailers are microbusinesses
Table 4: UK Retail and Employment (Information taken from Gov 2013)
Retail and Employment
- UK retail employs 3 million people (around a tenth of the workforce)
- 86% of retail companies employ fewer than 10 people. 66% of retail employees work for the
largest 75 retail companies
- Almost a third of retail employees are under 25 years of age
- 56% of retail employees work part time
- 54% of retail employees are in customer-facing roles
- 38% of retail employees have NVQ level 3 or higher qualifications
- 58% of retail employees are women
5
The face of UK Retail is ever changing because of the extremely high number of competitors within a
mature and saturated market forcing companies to respond quickly to changing trends, and the
needs of the consumers (Gov 2013; Mintel 2013). Retail facilities have progressed from high streets
and local parades towards shopping malls in 1960’s and 1970’s before the establishment of retail
parks and hypermarkets of the modern day (Gov 2013; Key Note 2014). Table 5 below identifies the
current industry trends.
Table 5: UK Department Store Trends (Information taken from Mintel 2014)
UK Department Store Trends
- Fashion is the main traffic driver for department stores with over half of shoppers buying
clothing and two fifths purchasing footwear.
- Around 83% of consumers purchase from department store websites.
- Online sales surged 29% to £2.8 billion (including VAT) in 2013.
- Increasing trend, particularly among young males, to purchase own store labels with
premium brands less important.
- The modern say department store must add differentiation and drive margins by introducing
well-designed, high quality and fashionable own-label clothing to compete with clothing
retailers.
The following section will assess the current UK retailing environment using relevant models to
identify and assess potential weaknesses and threats that should be considered before investment in
Debenhams.
6
2.1 PESTEL Analysis of the Retail Industry
Table 6: PESTEL Analysis of the Retail Industry
Element Trend Affect Upon Debenhams
Political - Increasing number of legislation restricting land-use by retail sector as the
Government pushes desire for growth of town centres to drive sustainability
(Burt and Sparks 2003; Gov 2013).
- Involved in the media campaign of ‘rip-off-Britain’ to investigate large
organisations prices and profits (Burt and Sparks 2003).
- Recent change of easing of restrictions on trading hours. (Burt and Sparks 2003)
- Concerns over public health have led to tighter regulation on food stores (Burt
and Sparks 2003).
- Government regulates health and safety
conditions of workers of Debenhams and
minimum wage structure is in place.
- Favourable political factors such as the
compulsory recycling laws have enabled
Debenhams to save on its costs on raw material.
Environmental - UK retail uses large amounts of land spread over large distances forcing
consumers to travel great distances impacting upon the environment (Burt and
Sparks 2003).
- Weather fluctuations have affected cotton harvest forcing raw price increases
(Telegrath Finance 2013).
- As a major retailer Debenhams must recognise
its obligation to create sustainable means of
operating.
- Environmentally friendly, reduced packaging is
being promoted by the Government which will
7
Environmental
(cont.)
- The rising costs of energy in all forms are a concern and one that needs to be
addressed in terms of energy efficiency and use reduction (Burt and Spark 2003;
Key Note 2014).
- At the store level they are heavy users of energy for lighting and heating,
retailers are always going to have cost concerns (Burt and Sparks 2003).
- Sustainability and recycling concerns are rising yearly on the agenda of
Governments and organisations (Burt and sparks 2003; Parsons and MacLaran
2009).
- Increasingly more frequent flooding and snow storms have impacted upon
business logistics and trading; while reducing consumer disposable income from
those that have been exposed (Hall 2011; Retail Bulletin 2013).
assist Debenhams corporate social responsibility
image.
Social
Social (cont.)
- In particular attitudes to work and leisure have evolved dramatically with
greater importance placed separating the two (Burt and Sparks 2003; Key Note
2014).
- Consumer confidence plummets as economic uncertainty is still at the forefront
of their minds (Telegrath Finance 2013).
- Recent UK special events such as The Olympics, Paralympics and Queen’s
Diamond Jubilee have helped to improve nationally pride and a sense of ‘feel
- Debenhams has operations across foreign
markets worldwide placing it as a diverse socio-
cultural arena.
- Ageing population needs to be addressed.
- EU expansion becomes further integrated into
the UK there is a distinct possibility for adaptation
to changing markets.
8
good’ (Office for National Statistics 2012).
- Retail industry is affected greatly by trends, such as fashion, compared to other
industries (Curtis et al. 2007; Deloitte 2014).
- Concern over the general ageing of the population, and overpopulation,
however presents opportunities to add products/services targeting this age
demographic adding another revenue stream to the portfolio (Key Note 2014).
- UK is becoming increasingly diverse with cultural, racial and ethnicity
considerations in product/service offering and processes (Shepherd 2010).
- At the same time, lifestyles are also changing with many people working longer
hours than before and more people entering or re-entering the labour market
working part time (Gov 2013)
Technological - Clothing manufacturers, particularly small-and medium sized firms regard the
high cost of electronic technology as a hindrance and so lack in interest in
acquiring the skills to operate them and share information with partners (Key
Note 2014).
- Global PC and mobile internet access with the fall in the cost of computer
processing by 30% per year for last 20 years is driving globalisation (Key Note
2014).
-High-speed global telecommunications through fibre-optic cables can transfer
- Debenhams has re-shaped its manufacturing
methodologies to produce their latest fashions
which have attracted large number of customers.
- Computerization has rendered some of
Debenhams’s plant machinery obsolete which has
increased costs.
-However Debenhams has adopted a rapid
computerization program with hired
9
Technological
(cont.)
information fast facilitating communication (Key Note 2014).
- Technology has changed shopping experience with many opting to shop from
home (Verdict 2013).
- Improved web search and internet usage has created austerity amongst
consumers with price and quality searches influencing demand and reputations
of businesses (Verdict 2013).
- Import/export advances driven by improved technology advancements have
created greater competition globally (Telegrath Finance 2014)
consultancies and professional to fast track the
process.
- By integrating e-business system and electronic
media has seen an increase in orders placed by
consumers.
Legal - Legislation enforcing equal opportunities designed to ensure equality in the
work place and selection processes (Pilbeam and Corbridge 2010)
- Minimum wage legislation within the UK continues to rise; and given the nature
of retail organisations reliance on large numbers of staff will raise costs (Gov UK).
- IAS 19 accounting regulation charging profits before tax of £2m negatively
impacting profit before tax.
- Debenhams must trade ‘responsibly’ within their
corporate responsibility report by acting ethically
with considerations to all aspects of their product
and services.
Economic - Recent levels of corporation tax in the UK have been lowered in order to
attempt to stimulate economic activity (Telegrath Finance 2014).
- Recently the UK unemployment figures have been rising whilst those in
employment have generally become wealthier as household disposable incomes
- Main economic issues affecting Debenhams UK
operations are the high inflation and
unemployment rates seen in the country.
- These economic factors are great concern to
10
Economic (cont.)
increase (Tutt 2012).
- Increasing labour costs globally with developing nations such as China
increasing minimum wages (Telegrath Finance 2013).
- Record low interest rates for the period to stimulate economic recovery (BBC
News 2014).
- Low strength of the Euro with UK at ‘arms-length’ to Europe has impacted
exchanged rats felt through the additional transaction costs (Key Note 2014).
- Credit crunch and subsequent economic downturn brought all of these drivers
of change into sharp focus, with the changes themselves happening at a far
greater pace. A Period of low consumer confidence, coupled with changes in
retailers’ costs relating to property, resources and the wider supply chain, have
increased financial pressures (Gov 2013).
- Between 2013 and 2020, the retail sector workforce is projected to grow by
around 55,000 (data from Working Futures), with the majority of these roles
managerial (Gov 2013).
- Eurozone crisis through countries such as Greece affecting the exchange rate of
Euros against sterling (BBC News 2012).
Debenhams as they influence demand, costs,
prices and profits.
- Debenhams are taxed at rates that are quite
high and does not benefit from tax holidays which
adversely affect its profits.
- Lower UK interest rates may have been seen as a
positive factor for Debenhams as they are
effectively able to borrow large amount of money
for the purpose of capital expansion.
11
12
2.2 Porter’s 5 Forces Analysis: Debenhams
Table 6: Porter’s Five Forces (Porter 1985 Adapted to the UK Retail Industry)
Force Explanation
New Entrants
(Low)
- Initial high start-up capital cost (Jones and Riley 1992).
- Growing industry consolidation resulting in difficulty of establishing a credible brand (Debenhams SWOT Analysis 2013; Jones and Riley
1992).
- Internet has made shopping more accessible for both consumers and retailers (Key Note 2014).
- Market share is dominated by leaders and those that move first (Key Note 2014).
- Established, large companies hugely benefit from economies of scale (Adewole 2005).
- UK consumer’s preference is to favour famous high street brands (Jones and Riley 1992).
- Technological innovations have substantially lowered barriers to market entry (Gov UK 2013)
- Unattractive market as exiting clothing firms continue to close at a very high rate (Adewole 2005; Christopher 1998).
Rivalry - Low income earners are less likely to turn to high street specialists (Key Note 2014).
13
(High) - This results in difficulty achieving a significant market share (Key Note 2014)
- Low pricing power amongst industry rivals and therefore low margins (Key Note 2014).
- Intensive rivalry between similar rivals within a mature and saturated market coupled with tough economic conditions.(Adewole 2005)
Substitutes
(High)
Substitute
(cont.)
- Value retailers target the low-income earning population (Mintel 2013).
-High availability of product and service differentiation (Key Note 2014).
- Extremely few global industry players (Adewole 2005; Christopher 1998).
- Import/Export opportunities improve as trade becomes more global (Doole and Lowe 2012).
- Increasing threat of substitutes from overseas driven by globalisation alongside counterfeit goods.(Adewole 2005; Christopher 1998)
- Switching costs are low for consumers.(Adewole 2005)
Buyers
(High)
- The market is highly concentrated coupled with little differentiation.(Adewole 2005)
-The industry is market-driven therefore consumers exert influence.( Jones and Riley 1992; Tiggelaar 1999)
- Loyalty to brands through relationship marketing can sustain revenue streams however it is very difficult within a competitive market
that offers extremely similar products/services.(Adewole 2005; Key Note 2014)
- Low switching brand cost and availability of close, cheaper substitutes.(Adewole 2005;Tiggelaar 1999)
14
Suppliers
(Medium)
- Many competitive suppliers in the Far East where most retailers outsource production.(Key Note 2014; Mintel 2013)
- Heavily reliant on deliveries and consistent quality to ensure brand is not damaged.(Adewole 2005; Christopher 1998)
- Possibility of horizontal integration through the supply chain to a seller.(Adewole 2005)
15
2.3 SWOT Analysis Debenhams
Table 7: Porter’s Five Forces (Porter 1985; Christopher 1998): Adapted to the UK Retail Industry
Strengths
Broad product and brand portfolio
- Helps to retain its customer base which enhances its top line performance.(Global
Company Intelligence 2014)
- It allows Debenhams to gain higher market share and increase overall revenue
(Global Company Intelligence 2014).
High volumes of sales
- Debenhams reported a 2.35% increase in revenue and 2.08% increase in net profit
during 2013 (Global Company Intelligence 2014).
- Also their like-for-like sales increased by 2.00% principally driven by growth in
online sales as multi-channel business continued to improve ahead of the market
with a 46.20% increase in online sales compared with market growth of 14.10%
(Global Company Intelligence 2014).
- Enables the company to pursue growth aggressively and improve confidence
Weaknesses
Geographic Concentration
- UK market accounts for 83.10%of total revenue with international
segments contributing the remaining 16.90% (Global Company
Intelligence 2014; Business Source Complete 2013)
- Restricts the company’s market share and limits revenue options
that may lower its competitiveness (Global Company Intelligence
2014).
- The company’s business concentration in the UK makes it
vulnerable to adverse market conditions in the region and puts it at
a competitive disadvantage over global retail giants (Business
Source Complete 2013).
- Any adverse developments in the UK market are very likely to
negatively impact upon the business (Global Company Intelligence
16
(Global Company Intelligence 2014).
Differentiated service offerings
- Variety of value-added services to its customers helps to generate higher sales
through word-of-mouth (Global Company Intelligence 2014).
- Own label ‘Designers at Debenhams’ provides cheaper alternatives to new market
segments (Global Company Intelligence 2014).
- Online website offers Debenhams account card, personal finance, products and
quotes for insurances (Global Company Intelligence 2014).
-Differentiates Debenhams from other retailers and generates loyalty in customers
(Global Company Intelligence 2014).
- Multi-channel retailing enhancing customer base through kiosks in store to order
products available online; iPhone application allows customers to shop easily from
their smartphone; allows the company to tap a growing number of customers who
are adopting the non-traditional route to shop for their needs (Business Source
Complete 2013).
- Debenhams has been reducing its dependence on borrowed funds in recent years;
De-leveraging enhances Debenhams’s borrowing capacity and flexibility to pursue
expansion plans (Business Source Complete 2013).
2014).
Branding
- Danger in becoming wedded to discounting which could damage
the brand long-term (Mintel 2013).
- Slow to change with limited innovativeness, 16-25 a much
underrepresented advertisement and promotions in this segment
(Mintel 2013).
- Declining like-for-like sales that is dependent upon the UK market
(Mintel 2013)
17
Opportunities
Global fashion is dynamic and an ever changing market
- Global apparel markets experiencing a paradigm shift towards increased product
differentiation with a diverse customer base (Global Company Intelligence 2014; Key
Note 2014).
- Emerging economies such as Brazil, Russia and China are attracting global retailers
(Global Company Intelligence 2014).
- Look to capitalise on its market leadership in the UK to expand its retail presence
globally to benefit from the changing dynamics of fashion (Global Company
Intelligence 2014).
- Rise in men’s fashion as the industry evolves with ‘metrosexual’ from rise of male
role models such as David Beckham (Key Note 2014)
Expanding the portfolio of products and services
- Intention to expand internationally into a multi-channel business (Global Company
Intelligence 2014).
- Debenhams is investing in systems across the business that will complement its fast-
growing multi-channel activities (Global Company Intelligence 2014).
Skilled labour shortages
- EU labour force is estimated to shrink by 0.20% a year between
2000 and 20130 (Global Company Intelligence 2014).
- International Centre for Peace and Development predicts that 110
million people might fall under the category above 65 age group by
2030 in Europe (Global Company Intelligence 2014).
- As the company principally operates in Europe labour shortage is
very likely to impact stability and operational efficiency (Global
Company Intelligence 2014).
Public spending reduced by the Government
- Public budget cuts could negatively affect consumer’s confidence
and spending power (Global Company Intelligence 2014).
- Retirement age to increase to 66 years by 2020 to reduce benefits
(Global Company Intelligence 2014).
- Expected that 490, 000 public sector jobs may be lost in the next
four years (Global Company Intelligence 2014).
- UK market suffering from weak consumer spending with the
European debt crisis adding more downward pressure to growth
18
- Targeting to open 150 franchise stores internationally within next five years (Global
Company Intelligence 2014).
- Such business expansion will enable the company to serve new markets and boost
revenue growth (Global Company Intelligence 2014).
Online retail shopping trends in the UK through portable devices such as
tablet and mobile
- Increased interactive methods and limitless content are progressing retail e-
commerce rapidly (Global Company Intelligence 2014; Key Note 2014).
- UK Trade & Investment predicts online retail business in the UK will reach EUR2
million by 2015 which may enforce closure of under-performing outlets to reduce
operating costs (Global Company Intelligence 2014).
- The growing desire for convenience is to get the best deal they can with improved
delivery and fulfilment options have been encouraging consumers to shop more
online (Business Source Complete 2013).
- The company’s online retailing business witnessed strong growth in 2012 with much
of the growth driven by the company’s efforts to integrate its store business with the
online business (Business Source Complete 2013; Key Note 2014).
-May further enhance shops and benefit from the growing online retail shopping
trends (Global Company Intelligence 2014; Key Note 2014).
prospects of the UK (Business Source Complete 2013).
- High unemployment rate is expected to put additional pressure on
the economy of the UK. Growing inflation, public spending cuts and
reduced disposable income are leading to a fall in consumer
spending on discretionary items (Business Source Complete 2013).
- These stringent measures may negatively impact the retail sales
that are heavily dependent on consumer spending power (Global
Company Intelligence 2014).
Counterfeit products widely available and increasing in
popularity
- High penetration of counterfeit merchandise may lower the
company’s sales and affect profit margins (Global Company
Intelligence 2014).
- Mistaking the product as the real brand will adversely affect
consumer confidence in buying and blemish the brand’s reputation
(Global Company Intelligence 2014).
- International trade in fakes is expected to increase to US$960
billion by 2015 (Global Company Intelligence 2014).
- Low price offerings adversely affect the sale of branded, genuine
19
- Customer relationship management systems for relationship marketing through
perks such as beauty card (Mintel 2013).
Globalisation to Foreign Markets
As the domestic market is mature, for the UK retail sector as a whole can only
achieve significant growth through an increase in international trade (Gov 2013).
With continued subdued growth in the mature markets of Europe, many UK retailers
have identified international markets as key drivers of future growth (Gov 2013; Key
Note 2014).
World class British brands and retailers are well placed to capitalise on the rapid
growth in the global middle class (Gov 2013).
products which remains a challenge to tackle (Global Company
Intelligence 2014).
- Growing online retail domain offering near identical products
counterfeit branded (Key Note 2014).
Rising Labour cost in the UK
- Tight labour markets, increased overtime, Government mandated
in minimum wages and a higher proportion of full-time employees
are resulting in an increase in labour costs (Business Source
Complete 2013).
- Increasing labour costs could affect operating costs as wage bills
would escalate and so impact margins adversely (Business Source
Complete 2013).
20
3.0 Competitor Analysis
To investigate Debenhams two rival companies have been selected below for comparison. They
were selected because they operate in similar industries, their size and ease of locating their
financial information. A brief summary of each company is provided below.
3.1 Marks and Spencer Group plc. (Hoovers 2014)British retail icon operating for more than 125 years with approximately 345 department stores and
385 Simply Food shops throughout the UK. Internationally, Marks and Spencer has stores in around
385 locations (mostly franchises) in about 40 countries that include China, India, Indonesia, Russia
and South Korea (Hoovers 2014). Sells mid-priced apparel, food and household items with 90% of
the company’s sales made in the UK where it is the top provider of womenswear, lingerie, and
menswear (Hoovers 2014).
3.2 NEXT plc. (Hoovers 2014)Next plc. sells moderately price clothing for men, women and children, housewares, and furniture
through approximately 530 stores; including 40 home stores in the UK and Ireland. It also franchises
around 165 stores in 30 countries in Asia, Europe, and the Middle East. Their target markets are
those customers in their 20’s and 30’s who seek affordable, stylish clothes to take them through the
next fashion cycle. Sales are through retail stores and the NEXT Directory catalogue and Web site
meeting needs of customers in approximately 50 countries.
21
3.3 Ratio Analysis
3.3.1 Profitability
Gross Profit Margin
(%) 2009 2010 2011 2012 2013
Debenhams 13.83 13.26 13.43 13.56 13.59
Next 27.77 29.26 29.21 30.38 31.60
M&S 37.21 37.94 38.24 37.80 37.86
Debenhams gross profit margin is very stable which suggests that both sales revenue and cost of
sales are not fluctuating which is in line with the Marks & Spencers, however NEXT are showing signs
of improvements. The stability is commendable given the increase in minimum wages over the past
5 years and the difficult trading environment caused by a weak economy; however Debenhams’s
margins are significantly lower than that of Marks & Spencers, and particularly Next with both
double in excess of that of Debenhams.
Net Profit Margin
(%) 2009 2010 2011 2012 2013
Debenhams 4.96 4.58 5.30 5.62 5.60
Next 9.21 10.66 11.56 13.75 14.26
M&S 5.65 5.48 6.15 4.93 4.57
When interpreting Net Profit Margin Debenhams competes far closer with Marks & Spencers and
even outperforming them by the end of the 5 years. This suggests that Debenhams has better
controls in place over their expenses however it does not account for interest and taxation expense.
By far the best retailer’s results examined were NEXT at nearly five times the percentage of both
Debenhams and Next.
The two margins are plotted conceptually on Figure 2 below to reveal the extent to which the
retailers have tight controls over the expenses. Debenhams and NEXT appear similar proportionally,
22
Marks & Spencers displays particularly poor control of expenses however further ratio analysis is
required to identify if this is a concern for an investment.
Figure 2: 2013 Conceptual Profit Margin Comparisons
DEB GP DEB NP NXT GP NXT NP MKS GP MKS NP0
5
10
15
20
25
30
35
40
Series1
Debenhams Summary of Profitability Margins
Profitability margins of Debenhams were very stable and relatively low which is due to their
cautionary approach to emergence from the recession. Focus upon improving multi-channel
presence began through 22 international franchise stores opened between 2009 and 2011 (See
Debenhams Financial Reports 2009 & 2010) to simultaneously increase foreign market share while
steady and relatively safe method of income. Debenhams’s business plan focused upon cash margin
not sales growth with the emphasis upon delivering outstanding value through space movement
away from concessions by shifting their sales mix towards their own brand ranges. This successfully
reduced their risk but also their profitability margins.
3.3.2 Liquidity
Current Ratio
(%) 2009 2010 2011 2012 2013
Debenhams 0.878 0.41 0.59 0.63 0.63
Next 1.54 1.37 1.28 1.54 1.48
23
M&S 0.60 0.80 0.74 0.73 0.57
An ideal current ratio is said to be 2:1 however that is as a generality and given the nature of retail
sector involving high stock turnovers often this figure is below this ratio with efficient operation
(Weetman 2010). NEXT has far greater confidence in their ability to meet their debts than
Debenhams in the short term in comparison to substantially lower values for both Debenhams and
Marks & Spencers. A concern for Debenhams would be that despite emerging from difficult times
their ratio has fallen since 2009 and most payments between a consumer and retailer are by card
transactions.
Quick Ratio
(%) 2009 2010 2011 2012 2013
Debenhams 0.44 0.14 0.14 0.17 0.15
Next 1.09 0.97 0.84 1.03 1.07
M&S 0.37 0.48 0.43 0.39 0.22
Similar to current ratio NEXT is still by far the strongest averaging around 1:1 however the stand out
figures are for Debenhams, who’s values are perilously low without the inclusion of their stocks in
their ability to liquidise assets to pay unforeseen debts.
Debenhams Summary of Liquidity Ratios
Debenhams 5 year interpretation of liquidity reveals concerning results as their ability to meet
unforeseen debts deteriorates to 0.15. This means that for every £1 of current liabilities they can
only meet with 15pand which is extremely high risk as any potential extra debts could result in
struggles or even bankruptcy for Debenhams. Factors that may have affected Debenhams’s low
liquidity values from insights into their financial report figures and strategy could be:
The restructuring of their balance sheet to raise capital whilst managing tight control over
stock control at a historically low level.
Aggressive discounting in the post-Christmas sales.
Increasing number of own brand sales mix reducing margins of revenue.
Expansion internationally expenditure.
24
3.3.3 Efficiency
Inventory Turnover
(%) 2009 2010 2011 2012 2013
Debenhams 7.07 7.18 6.88 6.71 6.38
Next 10.27 11.02 9.38 9.25 10.74
M&S 16.91 15.55 14.21 14.57 13.068
Debenhams has a stable inventory turnover in that is lower than its rivals, which may indicates that
less cash is tied up in inventory however it is important to consider possibility of stock shortages.
These five years were over a period of uncertainty which is perhaps why all three did not display
great amounts of change and so may be apprehensive to purchase more fixed assets.
Trade Receivables Collection
(Days) 2009 2010 2011 2012 2013
Debenhams 14 13 12 13 13
Next 72 67 69 75 74
M&S 19 18 16 15 15
In terms of efficiency Debenhams excels both NEXT and Marks & Spencers however Marks &
Spencers is similar. It is important for a company to watch the trade debtor position very carefully so
the company does not run into cash flow problems (Dyson 2010; Weetman 2010). NEXT collection
period seems very high in comparison but for a more reliable insight the collection period should
also take creditor payment period into account as ideally debts should be received in a shorter
period so that cash flow allows for the payment of creditors.
Trade Payables Collection
(Days) 2009 2010 2011 2012 2013
Debenhams 102 99 94 100 102
Next 75 84 82 84 81
25
M&S 69 72 82 86 89
The creditor payment periods revealed substantial advantages for retailers over their suppliers as
the rate in which they receive payment is far shorter than they make payments. This allows for a
healthy cash flow in operations and the ability to hold cash money for longer periods in banks
gaining interest. Debenhams again had the best payment controls in extending duration of payment
to their suppliers in comparison to their short debt collection; and also important to note the
relative consistency in their periods suggesting stable relationships with buyers and suppliers that
are unlikely to change in the foreseeable future.
Debenhams Summary of Efficiency Ratios
Given Debenhams tighter control of stock it is no surprise that their efficiency ratios are impressive
particularly in comparison to their rivals however it is for this reason too that their margins are likely
low. The impact of their multi-national expansion has had little impact on their efficiency which is a
testament to the implementation of strategy as suppliers and buyers have to be sourced and
relationships formed which can be difficult in the initial stages. Key reasons for Debenhams
efficiency obtained from the financial reports were:
Consolidation of space usage within shops to its maximum
Quick inventory turnover most likely from the increase in own brand sales mix resulting in
total control over product ranges.
Investment in technologies and logistics for both customer facing and back of house
operations in multi-channel efforts resulted in the benefit of economies of scale.
The purchase of Magasin du Nord in 2010 providing further manufacturing outlets.
The restructuring of their balance sheet to raise capital whilst managing tight control over
stock control at a historically low level.
3.3.4 GearingGross Gearing
26
(%) 2009 2010 2011 2012 2013
Debenhams 80.09 75.88 67.32 68.39 65.10
Next 91.19 86.28 87.03 87.99 84.91
M&S 71.06 69.44 63.54 61.79 67.14
Each of the retailers had extremely high geared companies in 2009 which is most likely the result of
the recession with interest rates at an all-time low of 0.5% to encourage borrowing and stimulate
economy spending (BBC News 2014). Highly geared companies however encompass substantial risk,
even more so during poor trading conditions with the percentage unusual to be above 50% however
this is subjective to the industry. The highly geared percentages also indicate the expansion that
each retailer were embarking on in respect to international stores, online presence and
accompanying services.
Debenhams Summary of Gearing Ratio
Debenhams gearing ratio suggested high risk however it is roughly in-line with both NEXT and Marks
& Spencers who operate within the same industry. Debenhams is however successfully reducing its
level of gearing over the 5 year period as indicated by the balance sheet non-current liabilities total
figure in 2009 at £1099m compared to £744.40m in 2013. The factors that have facilitated the
reduction in gearing indicated by financial reports were:
Cost minimisation focus strategy.
The repayment of long-term loans over the 5 year period.
The retaining of profits instead of a dividend payment in 2010.
Investment internationally through multi-channel facilitating revenue streams.
Long-term share buyback programme to return cash to shareholders in 2012 as new debt
reduced to a more stable level.
3.3.5 Investment
Return on Capital Employed
27
(%) 2009 2010 2011 2012 2013
Debenhams 7.92 13.94 12.30 11.60 11.07
Next 40.02 53.92 57.29 51.99 61.79
M&S 14.39 13.35 15.20 12.49 10.59
Return on capital employed includes shareholder’s funds and all long term debt that is being used to
fund the business. Debenhams displays a very small return on investment, and is far more volatile in
terms of increases and decreases when compared to the two other companies which may be due to
the difference in strategy and policy. NEXT is by far the more appealing retailer for an investor at a
high of 61.79% increasing over each of the 5 years. However it is important to consider that NEXT’s
total equity value over the 5 years equalled £1,031m, far below that of Debenhams and incredibly
lower than Marks & Spencers resulting in greater apportionment of profits- not an indication of
stability (See Table 8 below).
Table 8: Total Equity against Total Profit for Year Over 5 Year Period
Total Equity (5 Years) Total Profit for Year (5 Years)
Debenhams £2,993.70m £562.50
NEXT £1,031m £2044.9m
Marks & Spencer £12,219.40m £2,582.40m
Dividend Yield
(%) 2009 2010 2011 2012 2013
28
Debenhams 5.41 0 4.35 2.83 3.37
Next 4.92 2.90 3.61 3.03 2.27
M&S 7.09 4.05 5.02 4.49 4.36
Investors seek shares with high dividend yield because of extra income however too high a
percentage may indicate market does not believe the current policy can be maintained and
anticipates a cut. The dividend yields are very similar with the exception of Debenhams failure to pay
a dividend in 2010 as the company looked to reinvest to reduce net debt. Miller and Rock (1985)
suggest that it is normal to steadily increase dividend payments over time as a form of information
signalling however the tough economic time has clearly impacted all three retailers with dividend
yield decreasing since 2009. Difficult to pick a winner out of the three retailers but again Debenhams
would be the least appealing to an investor given its volatile dividend yield in comparison to its
rivals.
Forward Price Earnings Ratio (2015)
Debenhams NEXT Marks & Spencer
Forward P/E 9.40 246.30 26.46
Using predictions by Yahoo Finance Price/Earnings (average for comparison categories) the 2015
forward price earnings ratio reveals that NEXT is set to flourish with very favourable returns on share
price whereas Debenhams predicted improvement is marginal up to 9.40.
Earnings per Share Growth Rate
% 2009 2010 2011 2012 2013
Debenhams 11.11 -25 21.33 7.69 4.08
Next -7.53 20.83 17.72 27.08 13.51
M&S -34.35 3.72 15.82 -16.24 -10.15
The release of ordinary shares over the five years has diluted Debenhams net earnings as they look
to restructure their balance sheet with a cautious approach to emergence from unstable economic
conditions. All three retailers have struggled for consistency as expected from the economic
29
conditions however the current Marks and Spencers trend will be a cause for concern as its rivals
continue to post positive growth values. It is important to note the substantially less total equity
employed by NEXT suggesting that it is more efficient using its capital to generate income. This will
be investigated further using return on equity ratio.
Return on Equity
(%) 2009 2010 2011 2012 2013
Debenhams 22.36 19.27 17.77 18.96 17.18
Next 192.34 271.78 171,80 194.30 177.81
M&S 24.37 23.93 22.36 17.62 18.42
The return on equity percentage indicated hugely that NEXT was by far the best performer for those
seeking a return on their investment with consistent performances over 150% in stark comparison to
Debenhams and Marks & Spencer gradual decline at around the low 20% figure. The importance of
return on equity is the absence of long term debt which can explain the impact of debt usage upon
the profitability of the business. To further evaluate the components of return on equity a full Du
Pont Point analysis is provided in Tables 9 & 10 below.
Du Pont 3 Point Analysis (2013)
Table 9: Du Pont 3 Point Analysis (2013)
Debenhams NEXT Marks & Spencers
Net Profit Margin 0.06 0.15 0.05
Total Asset Turnover 1.07 1.88 1.32
Gross Leverage 2.87 6.63 3.04
Return on Equity (%) 17.18 177.87 18.42
Du Pont 5 Point Analysis
30
XXTotal Assets
Total Equity
Revenue
Total Assets
Net Profit Margin
Revenue
Table 10: Du Pont 5 Point Analysis (2013)
Debenhams NEXT Marks & Spencers
Tax Burden 0.83 0.76 0.81
Interest Burden 0.91 0.96 0.72
EBIT Margin 0.07 0.20 0.08
Asset Turnover 1.07 1.88 1.32
Loan Leverage 2.87 6.63 3.04
Return on Equity (%) 17.18 177.87 18.42
Asset Turnover for Debenhams is lower which may mean they are not benefitting from a substantial
margin on their prices OR have not sold as well as their rivals. They should also investigate their
economies of scale to try to improve profit margin as both NEXT and Marks & Spencers are far
superior in this respect.
Debenhams has the least amount of leverage of the three companies which provides greater
stability over its rivals as planned by the company to restructure their balance sheet with a cautious
strategy to the future growth (See Financial Reports Debenhams). Debenhams have steadily reduced
leverage which will be appealing to long term investments as it carries less risk against an economic
downturn.
EBIT margin revealed Debenhams to be the weakest however this is most likely because the
company is a low cost producer as indicated by their increase in own brand brands within their sales
mix and smaller advertising expenditure placing their product at the lower end of the pricing mix
within retail compared to NEXT and Marks & Spencers.
Debenhams summary of Investment Ratios
31
XX XXTotal Assets
Total Capital
& Reserves
Revenue
Total Assets
PBIT
REVENUE
PBT
PBIT
PAT
PBT
The investments ratios revealed Debenhams to be far less appealing than both NEXT and Marks &
Spencers with lower expected returns, volatile performance patterns and failure to pay a dividend in
the year 2010. Debenhams strategy suggests that greater caution has been taken than that of NEXT
who looks towards aggressive expansion which could lead to losses in market share. The factors that
indicated a more cautious growth strategy revealed by the company’s financial reports and
investment ratios were:
Predicted further reduction in forward price/earnings ratio down to 5.12.
Reinvestment of profits from failure to pay a dividend year end 2010.
Asset turnover is far below their rivals suggesting margins are inferior and/or are not
benefitting from economies of scale as efficiently.
Increase in own brand sales mix may be damaging to the perceived quality of the brand by
customers which is a concern given NEXT’s aggressive expansion indicators.
Dividend yield, earnings per share and return on equity have all fallen consistently year on
year suggesting smaller returns for shareholders in the future
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4.0 Share Price Movement
This section will provide an interpretation of the trends and movement in share price within the UK
retail industry by comparing it against the FTSE 100 of which all three retailers (Debenhams, NEXT
and Marks & Spencers) trade within using information from Markets FT (2014). By investigating
share price movements a more clear recommendation as to investment can be made as it will both
conceptually and analytically display the performance and volatility of the industries movements.
The insights will be particularly important given the emergence from tough economic conditions to
reveal how each retailer has fared and the future strategies adopted in a growing economy.
Figure 3: Debenhams Share Price 5 Year Trend against Competitors (Taken from Yahoo Finance)
33
Figure 4: FTSE Share Price 5 Year Trend (Taken from Yahoo Finance)
4.1 Summary of the UK Retail Industry Major Events over 5 Years(Using information taken from Debenhams Financial Reports – all years, and Yahoo Finance 2014)
Year Debenhams Share Price FTSE 100 Share Price
2009 88.75p 4348.75p
2009 was a period of highly volatile trading for almost every retail company as a result of wider
economic factors with the financial year coinciding with the worst of the credit crunch. High profile
collapses in the financial service sector negatively impacted consumer confidence despite low
mortgage payments from a record low interest rate giving rise to higher disposable income for
consumers. The FTSE 100 as a whole outperformed the retail sector however comparisons were
difficult given the volatile economy globally; Debenhams kept pace with both NEXT and Marks &
Spencers.
34
Year Debenhams Share Price FTSE 100 Share Price
2010 75.30p 5534.20p
In 2010 the retail environment remained challenging throughout with consumers cautious in their
spending as unsettling financial and economic news from around the globe directly impacted the
high street. Interest rates remained low to facilitate higher disposable income and drive spending
however unemployment and Government finances were still a concern. Labour costs increased
globally, most notably in China, while British sterling deteriorated against the US dollar coupled with
a VAT increase from January 2010. Weather fluctuations led to poor cotton harvests led to the
increase of raw cotton prices and cost of cotton fabrics however the clothing market value did
increase by 1.3% during the year. This however was more a function of price increases than that of
market growth. The FTSE 100 share price pattern was very similar to the retail sector, particularly
Debenhams marking the improvement in trading albeit cautious approach of the UK economy.
Year Debenhams Share Price FTSE 100 Share Price
2011 74.20p 5984.30p
The UK economy in 2011 experienced fundamental evolution accelerated by the recession forcing
retailers to become more professional which was in-line to the performance of the FTSE 100. As a
maturing, saturated sector coupled with the prospect of an ageing population reducing demand, UK
retail organisations knew that future challenges lay ahead. Despite further increase in disposable
income and easy credit allowing consumers to buy more, their willingness to spend dramatically
reduced due to rising utility, and transport costs alongside actual job losses. Consumer’s confidence
in shopping has fallen due possibly due to further VAT increases as their priority is now to pay off
debts and/or save rises. Expenditure upon items was more focused upon selective choices in far
fewer quantities. The retail industry experienced reductions in profit margins as cotton prices
increased forcing production costs higher which travelled through the supply chain.
Year Debenhams Share Price FTSE 100 Share Price
2012 58.55p 5649.70p
35
2012 saw an unprecedented number of special events that included The Olympic and Paralympic
Games, as well as the Queen’s Diamond Jubilee which facilitated growth in trading reflected by the
gradual increase in share price of the FTSE 100 over the first half of the year. However warm autumn
and winter followed by an extremely wet spring and summer season depressed consumer demand
enormously in an already unstable environment after these events had finished. Unemployment
levels continued to be high as further public sector jobs were cut which the private sector could not
accommodate. This is a result of the recession expediting smaller retailers that could not sustain
their operations through low margins and high volumes (Verdict 2013). A favourable development
saw the reduction of costs as cotton fabric prices lowered alongside other fabrics such as polyester
and wool which saw the UK retailers improve with Debenhams a particularly enjoying a successful
period with share price increase from 58.55p in 2012 and 117.90 in 2013. However this was offset by
labour costs continuing to rise with developing nations such as China increased minimum wages.
Year Debenhams Share Price FTSE 100 Share Price
2013 117.90p 6121.60
2013 saw a trend toward UK retailers adopting elevated and prolonged discounting in stores as
competition intensified from a number of high profile exits and extreme weather conditions seeing
large snowfall in January and a cold snap in March reducing footfall. Consumer confidence began to
grow as media driven news displaying a growing economy however rapid advancements and usage
of technology led to consumers shopping from home with websites increasingly becoming the first
point of contact a retailer has with potential customers (Deloitte 2012; Verdict 2013). Verdict (2013)
reports that austerity amongst consumers has settled in with price and quality the key decision
maker in buying decisions, evolving from the ease of social media and web searches to influence
demand and businesses’ reputations instantaneously. UK retailers suffered from deflation at its
deepest since 2006 at 9.7% alongside the revised IAS 19 charging profits before tax of £2m
negatively impacting profit before tax.
FTSE 100 saw an upward swing that was in correlation to retail industry as a whole however
Debenhams saw a severe slump with volatile share price figures throughout the year and into 2014
and it is for this reason that a year’s analysis of share price within the UK retail sector against the
FTSE 100 is provided in the next section of this report.
36
Figure 5: Debenhams Share Price 1 Year Trend against Competitors (Taken from Yahoo Finance)
Figure 6: FTSE Share Price 1 Year Trend (Taken from Yahoo Finance)
37
4.2 Summary of the Debenhams Major Events over 2013
Date Debenhams Share Price FTSE 100 Share Price
26-May-2013 91.15p 6400.50p
Share price for all three companies relatively low as 2013 saw a trend of retailers adopting elevated,
and prolonged discounting in stores as competition intensified from a number of high profile exits
and extreme weather conditions seeing large snowfall in January and a cold snap in March reducing
footfall. This is evident in the comparison in downward and volatile trend of Debenhams share price
of 91.15p against the FTSE 100 at 6400.50. Telegrath (2013) reported the growth in internet sales
becoming more profitable than store sales for Debenhams as their online business grew sales 46% to
£194m in the half-year accounting for 13% of total sales.
Date Debenhams Share Price FTSE 100 Share Price
30-June-2013 86.65p 6029.10p
Telegrath (1013) reports sales at Debenhams have “stagnated” as spring chill take its toll upon sales
in the third quarter resulting in a drop of 14.40p to 86.65p alongside the FTSE100 drop down to
6029.10p. However the store plans to create 430 jobs through the transformation of its flagship
store.
Date Debenhams Share Price FTSE 100 Share Price
01-July-2013 97.30p 6307.80p
Uncertainty in Egypt continued with millions nationwide calling for the resignation of their President.
UK consumer confidence began to grow as media driven news broadcast regular reports suggesting
that the economy was growing. Rapid advancements in technology and usage of smart devices led to
increasing number of customers shopping from home with websites becoming crucial as often the
first point of contact a retailer has with their customers (Verdict 2013). Telegrath (2013) report
Debenhams signing of Todd Lynn- a clothes designer who has worked with pop music stars Bono,
Mick Jagger and Beyonce. Debenhams share price rise to 97.30p and increase of 9.35p.
38
Date Debenhams Share Price FTSE 100 Share Price
01-July 2013 109.30p 6682.00p
Improvement across all three retailers for this period growing in similar trend to that of the FTSE
100, with Debenhams signing French fashion giant Promod, an affordable French chic retailer
(Telegrath 2013). Austerity amongst consumers with respect to buying behaviour as price and
quality move to the front of the consumer’s wants. This has evolved from the ease in comparing
wide ranges of similar products via the web and social media sites which have the ability to influence
demand and businesses’ reputations instantaneously (Verdict 2013).
Date Debenhams Share Price FTSE 100 Share Price
21-November- 2013 99.30p 6731.40p
Crucial sales period sees Debenhams lose ground on rivals issuing a fall in profits from the release of
their annual financial report released (Debenhams Annula Report 2013); the first time this has
occurred in five years despite online sales surge by 46% (Telegrath 2013). The closure of 6 franchise
stores in Romania is likely to have had a huge impact upon their pre-tax profit of £154m in the year
to August 31 which was in line with analyst expectations however down on the £158.3m made the
previous year. NEXT plc. begins to pull away from its rivals as Debenhams slumps down to 99.30p in
a period of expected high sales as demonstrated by the substantial increase in FTSE100 at 6731.40p
and rival retailers also improving.
Date Debenhams Share Price FTSE 100 Share Price
18-December-2013 78.45p 6492.10
More than £1bn was wiped off the value of leading retailers over Christmas fears with concerns
growing about slow Christmas trading (Telegrath 2013). This trend was similar to the FTSE 100 in its
reduction down to 6492.10 signalling a difficult trading period. Debenhams requested discount from
suppliers which are said to be a “contribution” to the retailer’s investment in new store openings
and the £25m revamp of its flagship Oxford Street store. The challenge for shops has been
compounded by a warmer-than-average autumn that has left fashion retailers nursing a pile of
39
unsold winter coats and jumpers. This has led to heavy discounting on the high street, with H&M
offering up to 50pc off clothing this week.
Date Debenhams Share Price FTSE 100 Share Price
01-January-2013 73.00p 6749.10p
FTSE 100 rockets upward from successful Christmas trading period as Debenhams slumps down to
73.00p, with the Debenhams’s boss quoted “the high street was ‘sea of red’ in run-up to Christmas”
(2013 Telegrath). This led to profits now far lower than expected due to margins hit by heavy
discounting after the store issued major profits warnings. Chief Executive Michael Sharp position
becoming increasingly uncertain as Debenhams finance boss Simon Herrick quits.
Date Debenhams Share Price FTSE 100 Share Price
13-January-2013 85.65p 6757.20p
Sports Direct takes 4.6pc stake in Debenhams with a shareholding of almost £50m acquired by Mike
Ashley raising share price of Debenhams by 5pc to 85.64p (Telegrath Finance 2013). However Mike
Ashley sells Debenhams shares just four days after the purchase but keeps options open on
Debenhams with requirement to buy shares equivalent to a 6.6pc stake in Debenhams at a
predetermined price and date (Telegrath Finance 2013).
Debenhams Summary of Share Price Movement
The failure of Debenhams’s strategy to fully appreciate the importance of the rise in popularity of
handheld technology through laptops, mobiles and tablets (Deloitte 2012). Steps to encourage
interaction through relationship marketing to build loyalty and provide wide availability of
knowledge may have seen a more successful financial trading year. Their international expansion
although impressive did not make up for misunderstanding the changing trend in consumer wants
and needs. Using Verdict (2013) prediction of austerity measures further underlines the perhaps
poor decision to saturate their sales mix with own brand products as customer wants for quality
aided by widely available information via the web may have led the consumer to opt to shop at
stores such as John Lewis.
40
4.3 Altman Z-Scores (Altman 2000)Formula Used: Z = 1.2 T1 + 1.42 +3.3T3 + 0.6T4 + .999T5
Where, T1 = Working Capital / Total Assets; T2 = Retained Earnings / Total Assets T3 = Earnings before
Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Net Sales / Total
Assets
Debenhams Current Altman Z-Score (as at 13-05-2014) (Guru focus 2014)
During the past 11 years, Debenhams PLC’s highest Altman Z-Score was 1.76. The lowest was 0.54.
And the median was 0.96. Currently Debenhams Altman Z-Score is at 1.61 which places it within the
‘Distress Zone’ as its score is less than 1.81.
NEXT Current Altman Z-Score (as at 13-05-2013) (Guru focus 2014)
During the past 13 years, NEXT Plc.’s highest Altman Z-Score was 9.23. The lowest was 3.23. And the
median was 5.73. Currently NEXT Altman Z-Score is at 7.61 which place it within the ‘Safe Zone’ as its
score is greater than 2.99.
Marks & Spencers Current Altman Z-Score (as at 13-05-2013) (Guru focus 2014)
During the past 13 years, Marks & Spencer Group PLC’s highest Altman Z-Score was 5.19. The lowest
was 2.01. And the median was 3.38. Currently Marks & Spencer Altman Z-Score is at 3.38 which
place it within the ‘Safe Zone’ as its score is greater than 2.99.
41
Table 11: Breakdown Summary of Altman Z-Scores
Value Debenhams NEXT Marks & Spencers
X1 -0.13 0.30 -0.13
X2 0.03 0.89 0.81
X3 0.07 0.31 0.06
X4 0.73 5.43 1.63
X5 1.07 1.74 1.32
Score 1.62 7.63 3.47
Debenhams is at serious risk of bankruptcy when considering their current Altman Z-Score of 1.61
(as at 13-05-2014) placing it within the ‘Distress Zone’ as its score is less than 1.81 (Altman 2000).
This is due to its negative working capital/total assets ratio resulting in poor ability to liquidise, weak
productivity of assets measured through earnings before interest and tax/total assets and extremely
low leverage of reinvested earnings over the firms life measured through retained earnings/total
assets ratio (Altman 2000). This however is not a norm for UK retailers because of the industry as
both NEXT and Marks & Spencers place within the ‘Safe Zone’ with their scores.
4.4 Beta-Coefficient ScoresBeta-coefficient measures the stock of a company against the overall market to reveal the extent
they are more or less volatile than the market in terms of risk. Debenhams Beta score is greater than
1 (See Table 12 below) and so have greater price volatility than the overall market and both NEXT
and Marks & Spencers and so in the short term would be high risk for investment (Yahoo Finance
2014).
Table 12: Breakdown Summary Beta-Coefficient Scores
Debenhams NEXT Marks & Spencers
Beta-Coefficient 1.16 0.66 0.98
42
5.0 RecommendationsAfter a review of the environmental factors affecting the UK retail industry, critical analysis of
company performance against competitors over a five year period, and the interpretation of share
price movement, the evidence within this report advises to make no investment within Debenhams
plc.
UK retailers have struggled in recent years since the recession to operate profitably within a mature
and highly saturated market. Market shares have reduced from advancements in technology and the
evolvement of customer behaviour as shopping from home via mobile, laptop or tablet devices has
seen a dramatic increase in successful online retailers such as ASOS. This has led to heavy
investment strategy by Debenhams to improving their e-commerce through their website; however
this has had stumbles in building reputation by its delay in implementation. The advancements of
technology and austerity of customers has also reduced margins for Debenhams as price
comparisons using online sources has forced retailers to price match similar products to ensure
market share is not lost. As marketing moves away from product orientation, towards relationship
orientation Debenhams must implement facilities that encourage interaction of customers to build
loyalty.
The ratio analysis against two rival competitors indicated similarity in respect to profitability,
efficiency and gearing (although NEXT was the standout performer over the five years) with minimal
deviation from each year which suggests stability. However the investment ratios fall very short of
the returns expected from Marks & Spencers, and particularly from NEXT. The failure to pay a
dividend in 2010 taken in consideration with far less returns on expected dividend yield, earnings per
share and return on equity. It is important to note that the figures deviate substantially each year
suggesting high volatility and therefore a high risk investment venture. A breakdown of investment
performance using Du Pont indicated that Debenhams are not receiving large enough margins on
their sales in comparison to rivals which is likely as a result of the increase in cheaper priced own
brand products in the sales mix and poor weather effecting a crucial holiday period for retailers
sales.
Debenhams advancements internationally although admirable have ultimately not been enough to
compete within the market. Two profit warnings have had hugely detrimental effects upon
Debenhams’ share price with their largest problem currently the amount of discounting across the
high street which is signalling inferior quality to rival up-market department stores such as John
43
Lewis. The volatile share price movements have not been aided by the frequent changes in
personnel at Debenhams resulting in multiple strategy changes which do not instil investment
confidence in the long-term. The failure of Debenhams to recognise the increasing trend of online
shopping whilst diluting their sales mix with more own brand products and regular high discounting
has both negatively affected share price while potentially damaging the brand’s perception of
quality.
Looking forward both the Altman Z-Score (1.61) and Beta-Coefficient Score (1.16) reveal great
concern over future of Debenhams with high volatility against the overall market and a very possible
chance of bankruptcy. The recent interactions of Sports Direct intent to purchase shares at
Debenhams could well see a surge in both sales and share price however the using the Forward
Price/Earnings ratio (9.4) reveals a near identical figure which suggests that there is extremely low
confidence in Debenhams performing better in the next year.
44
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49
50
7.0 AppendicesDebenhams Income Statement 2009 2010 2011 2012 2013
£m £m £m £m £m
Revenue (Turnover) 1,915.60 2,119.90 2,209.80 2,229.80 2,282.20
Cost of Sales 1,650.70 1,838.90 1,913.10 1,927.50 1,972.10
Gross Profit 264.90 281.00 296.70 302.30 310.10
Operating Expenses
Distribution Costs 45.30 55.10 70.20 81.00 97.40
Administration Expenses 37.40 43.00 42.80 46.30 44.70
Operating Profit 182.20 182.90 183.70 175.00 168.00
Other Income (Gains/losses) 0.00 6.8 0 0 0
Interest Receivables 1.3 6.7 3.9 1.2 1.5
EBIT (Profit/ Loss before Interest & tax) 183.50 196.40 187.60 176.20 169.50
Exceptional Items - 6.8 - - -
Interest Payables 62.70 56.50 27.30 17.90 15.50
EBT (Profit/Loss before Tax) 120.80 139.90 160.30 158.30 154.00
Taxation 25.70 42.90 43.10 33.00 26.10
Profit/Loss after Tax 95.10 97.00 117.20 125.30 127.90
Minority Interests 0 0 0 0 0
Profit from Discontinued Operations 0 0 0 0 0
Profit /Loss for Period 95.1 97 117.2 125.3 127.9
Dividends Paid 4.30 0.00 12.90 38.50 41.40
Retained Profit /Loss 90.80 97.00 104.30 86.80 86.50
EPS (p) basic 10 7.5 9.1 9.8 10.2
51
Debenhams Balance Sheet 2009 2010 2011 2012 2013
52
£m £m £m £m £mAssets
Non-Current Assets
Intangible Assets 839.9 846.2 858.1 864.9 876.5Property, plant and equipment 669.20 676 634.60 661.6 692.10Investment property 8.8 7.8 2.6 1.9 1.1Investment in Joint ventures - - - - -Other financial assets - - - - -Retirement benefit asset - - 3.9 - 4.6Trade and other receivables - 17.2 18.3 19.3 16.8Derivative financial instruments 0.2 0.9 1.4 0.8 1.9Deferred tax assets 80.6 92 75.7 83.2 69.3Total Fixed Assets 1598.7 1640.2 1594.6 1631.7 1662.3
Current Assets
Inventories 270.9 295.3 321.3 332.3 357.9Other financial assets - - - - -Trade and other receivables 68.5 73.4 72.1 75.4 78.3Derivative financial instruments 9.5 8.9 1.2 7.8 7.3Current tax assets - - - - -Cash and cash equivalents 188.2 69.5 29 44 27Total Current Assets 537.1 447.1 423.6 459.5 470.5
Liabilities
Current Liabilities
Trade and other payables 458.60 494.20 489.10 525.40 545.80Borrowings and other financial liabilities 92.60 545.70 168.10 163.40 163.10
Derivative financial instruments
200924.20
20101.80
20118.50
20121.90
20132.10
Provisions 2.10 4.40 6.20 5.30 5.60
53
Current Tax liabilities 34.00 37.50 43.70 31.00 25.30Total Current Liabilities 611.50 1083.60 715.60 727.00 741.90Net Current Assets/Liabilities -74.40 -636.50 -292.00 -267.50 -271.40
Non-Current Liabilities
Retirement benefit deficit 53.60 80.70 - 57.30 24.60Trade and other payables 273.00 285.70 318.90 321.90 322.10Partnership liability - Debenhams pension scheme - - - - -Borrowings and other financial liabilities 685.90 40.60 244.60 249.30 235.90Derivative financial instruments 8.00 7.50 4.20 8.90 3.70Provisions 0.20 2.00 1.20 1.10 1.10Deferred Tax liabilities 78.30 83.80 74.10 64.70 59.10Total Non-Current Liabilities 1099.00 500.30 643.00 703.20 646.50
Net Assets 425.30 503.40 659.60 661.00 744.40
Capital & ReservesIssued Share Capital 0.1 0.1 0.1 0.1 0.1Share Premium Account 682.9 682.9 682.9 682.9 682.9Capital redemption reserve 1,504.70 1,200.90 1,200.90 1,200.90 1,200.90ESOT Reserve 1199.90 1199.90 1199.90 1199.90 1199.90Fair Value Reserve 18.5 0.8 6.20 2.6 3.20Foreign Currency Transition - - - - -Other reserve 2.60 5.20 3.10 10.50 7.70Retained Earnings 546.60 176.20 15.10 9.90 64.90Equity Shareholders Funds 425.30 503.40 659.60 661.00 744.40
Equity Minority Interests
2009 2010 2011 2012 2013
Total 425.30 503.40 659.60 661.00 744.40
54
Share Price (p) 79.5 58.75 68.9 116.6 101
No. of shares in issue (m)950,800,00
01,286,800,00
01,286,800,00
01,282,000,00
01,255,100,00
0Market Cap (m) 755886000 755995000 886605200 1494812000 1267651000
Debenhams RatiosRatios 2009 2010 2011 2012 2013
55
EPS Basic (p) 10.00 7.50 9.10 9.80 10.20
Creditor Collection Period (Days)101.4
0 98.09 93.32 99.49101.0
2
Current Ratio (?:1) 0.88 0.41 0.59 0.63 0.63
Debtor Collection Period (Days) 13.05 12.64 11.91 12.34 12.52
Dividend Per Share (p) 4.30 - 3.00 3.30 3.40
Dividend Yield (%) 1.10 0.70 0.86 0.54 0.63
DU Pont 3 Point Basic ROE (%)485.4
5435.4
1489.7
6511.2
0485.5
8
Du Pont 5 Point Basic ROE (%) - - - - 0.17
EPS Growth Rate (%) 11.11 -36.43 22.33 -36.91 15.84Gross Gearing (financial ratios) (%) 80.09 75.88 67.32 68.39 65.10
Gross Profit Margin (%) 13.83 13.26 13.43 13.56 13.59
Inventory Turnover (Times) 7.07 7.18 6.88 6.71 6.38
Net Profit Margin (%) 4.96 4.58 5.30 5.62 5.60
P/E ratio (p) 7.95 7.83 7.57 11.90 9.90
Quick Ratio (?:1) 0.44 0.14 0.14 0.17 0.15
Return on Cap Employed (%) 7.92 13.94 12.31 11.60 11.07
Return on Equity (ROE) (%) 22.36 19.27 17.77 18.96 17.18
Du Pont 3 Point ROE Breakdown 2009 2010 2011 2012 2013
Net Profit Margin 0.05 0.05 0.05 0.06 0.06
Total Asset Turnover 0.90 1.02 1.09 1.07 1.07
Gross Leverage 5.02 4.15 3.06 3.16 2.87
2015
Forward Price/Earnings Ratio 9.4
56
NEXT Income Statement 2009 2010 2011 2012 2013
£m £m £m £m £m
Revenue (Turnover) 3,271.50 3,406.50 3,453.70 3,441.10 3,562.80
Cost of Sales 2,363.00 2,409.60 2,445.00 2,395.80 2,437.00
Gross Profit 908.50 996.90 1,008.70 1,045.30 1,125.80
Operating Expenses
Distribution Costs 234.40 232.10 223.20 245.70 269.50
Administration Expenses 192.90 236.60 214.70 201.30 201.00
Operating Profit 481.20 528.20 570.80 598.30 655.30
Other Income (Gains/Losses) 3.80 0.7 2.2 2 39.2
Interest Receivables 1.3 0.8 0.9 6.6 0.4
EBIT (Profit/Loss before Interest & Tax) 478.70 529.70 573.90 606.90 694.90
Exceptional Items 38
Interest Payables 50.80 25.30 24.30 28.90 29.00
EBT (Profit/Loss before Tax) 427.90 504.40 549.60 578.00 665.90
Taxation 126.50 141.30 150.50 145.30 157.90
Profit/Loss after Tax 301.40 363.10 399.10 432.70 508.00
Minority Interests 0 0 0 0 0
Profit from Discontinued Operations 40.6
Profit(Loss) for Period 301.4 363.1 399.1 473.3 508
Dividends Paid 106.50 108.50 129.60 135.10 147.70
Retained Profit/Loss) 194.90 254.60 269.50 338.20 360.30
EPS (p) basic 156 188.5 221.9 282 320.1
57
NEXT Balance Sheet 2009 2010 2011 2012 2013
£m £m £m £m £m
Assets
Non-Current Assets
Intangible Assets 55.4 47.4 46.5 45.6 44.8
Property, plant and equipment 612.80 577 592.40 581.9 537.30
Investment property 3.5 4 5.1 6.1 7.2
Investment in Joint ventures 1 1 1 1 0
Other financial assets 14.1 22.7 24.3 44.6 30.9
Retirement benefit asset 0 0 55.7 35.1 65.6
Trade and other receivables 0 0 0 0 0
Derivative financial instruments 0 0 0 0 0
Deferred tax assets 0 0 0 0 0
Total Fixed Assets 686.8 652.3 725 714.3 685.8
Current Assets
Inventories 318.7 309 368.3 371.9 331.8
Other financial assets 84.4 8.6 4.1 12.5 21.6
Trade and other receivables 639.6 616.6 645.6 699.1 718.1
Derivative financial instruments 0 0 0 0 0
Current tax assets 0 0 0 0 0
Cash and cash equivalents 47.8 107 49.3 56.4 136.3
Total Current Assets 1090.5 1041.2 1067.3 1139.9 1207.8
Liabilities
Current Liabilities 2009 2010 2011 2012 2013Trade and other payables 485.10 550.30 544.60 545.00 537.20
58
Borrowings and other financial liabilities 15.80 93.60 54.70 87.00 87.50
Derivative financial instruments 0.00 0.00 0.00 0.00 87.60
Provisions 121.30 4.70 125.20 7.60 5.40
Current Tax liabilities 85.90 109.50 108.40 102.80 98.30
Total Current Liabilities 708.10 758.10 832.90 742.40 816.00
Net Current Assets 382.40 283.10 234.40 397.50 391.80
Non-Current Liabilities
Retirement benefit deficit 69.10 49.50 0.00 0.00 0.00
Trade and other payables 226.00 210.10 216.50 205.20 210.00
Partnership liability - Next pension scheme 0.00 0.00 0.00 0.00 0.00
Borrowings and other financial liabilities 2.40 4.40 2.60 4.40 0.00
Derivative financial instruments 567.80 520.90 471.20 652.10 566.80
Provisions 13.10 13.40 13.30 12.00 11.20
Deferred Tax liabilities 34.20 3.70 23.40 15.40 4.00
Total Non-Current Liabilities 912.60 703.00 727.00 889.10 792.00
Net Assets 156.60 232.40 232.40 222.70 285.60
Capital & Reserves
Issued Share Capital 19.7 19.1 18.1 16.9 16.1
Share Premium Account 0.7 0.7 0.8 0.8 0.9
Capital redemption reserve 10.20 10.80 11.80 13.00 13.80
ESOT Reserve 48.70 78.20 138.60 141.10 215.60
Fair Value Reserve 69.6 5.1 3.20 11.5 8.30
Foreign Currency Transition2009
9.72010
4.72011
4.62012
220132.00
Other reserve 1,443.80 1,443.80 1,443.80 1,443.80 1,443.80
Retained Earnings 1,539.30 1,615.20 1,782.60 1,763.40 1,904.00
59
Equity Shareholders Funds2009
156.702010
133.602011
232.302012
222.702013
285.70
Equity Minority Interests 0.10 0.20 0.1 0 0.10
Total 156.60 133.40 232.40 222.70 285.60
Share Price (p) 1,097.00 1,966.00 1,994.00 2,639.00 4,059.00
No. of shares in issue (m) 197.097000 191.169000 181.221000 168.740000 161.234237
Market Cap (m) 2,162.15 3,758.38 3,613.55 4,453.05 6,544.50
NEXT Ratios
Ratio 2009 2010 2011 2012 2013
60
EPS Basic (p) 156.00 188.50 221.90 282.00 320.10
Creditor Payment Period (Days) 74.93 83.36 81.30 83.03 80.46
Current Ratio (?;1) 1.54 1.37 1.28 1.54 1.48
Debtor Collection Period (Days) 71.36 66.07 68.23 74.15 73.57
Dividend Per Share (p) 54.00 57.00 72.00 80.00 92.00
Dividend Yield (%) 6.51 3.36 3.42 2.81 1.81
DU Pont 3 Point Basic ROE (%) 665.03 1225.58 973.75 1190.97 1941.43
Du Pont 5 Point Basic ROE (%) - - - - 1.78
EPS Growth Rate (%) -57.70 -7.42 3.27 8.68 -0.79
Gross Gearing Ratio (%) 91.19 86.28 87.03 87.99 84.92
Gross Profit Margin (%) 27.77 29.26 29.21 30.38 31.60
Inventory Turnover (Times) 10.27 11.02 9.38 9.25 10.74
Net Profit Margin (%) 9.21 10.66 11.56 13.75 14.26
P/E ratio (?:1) 7.03 10.43 8.99 9.36 12.68
Quick Ratio (?:1) 1.09 0.97 0.84 1.03 1.07
Return on Cap Employed (%) 40.02 53.92 57.29 51.99 61.79
Return on Equity (ROE) (%) 192.34 271.78 171.80 194.30 177.81
Du Pont 3 Point ROE Breakdown 2009 2010 2011 2012 2013
Net Profit Margin 0.09 0.11 0.12 0.13 0.14
Total Asset Turnover 1.84 2.01 1.93 1.86 1.88
Gross Leverage 11.35 12.69 7.71 8.33 6.63
2015
Forward Price/Earnings Ratio 246.3
61
Marks & Spencers Income Statement 2009 2010 2011 2012 2013
62
£m £m £m £m £m
Revenue (Turnover) 9,062.10 9,536.60 9,740.30 9,934.30 10,026.80
Cost of Sales 5,690.20 5,918.10 6,015.60 6,179.10 6,230.30
Gross Profit 3,371.90 3,618.50 3,724.70 3,755.20 3,796.50
Operating Expenses
Selling and Administrative expenses 2644.5 2,831.50 2959.7 3,021.90 3,107.00
Non-GAAP adjustments to underlying profit - 8.1 12 63.50 25.60
Operating Profit 727.40 795.10 777.00 669.80 663.90
Other Income (Gains/losses) 47.9 56.9 59.9 76.7 92.10
Interest Receivables 50 12.9 42.3 48.3 26.5
Exceptional Items 101.8 0 0 0 0
EBIT (Profit/Loss before Interest and Tax) 927.10 864.90 879.20 794.80 782.50
Interest Payables 214.5 162.2 98.6 136.8 218.2
EBT (Profit/Loss before Tax) 712.60 702.70 780.60 658.00 564.30
Taxation 199.4 179.7 182 168.4 106.3
Profit/Loss after Tax 513.20 523.00 598.60 489.60 458.00
Minority Interests 1.2 0 0 0 0
Profit/Loss for Period 512.00 523.00 598.60 489.60 458.00
Dividends Paid 354.6 236 247.5 267.8 271.3
Retained Profit/Loss 157.40 287.00 351.10 221.80 186.70
EPS (p) basic 32.3 33.5 38.8 32.5 29.2
Marks & Spencers Balance Sheet
Marks Balance Sheet
2009 2010 2011 2012 2013
63
£m £m £m £m £m
Assets
Non-Current Assets
Intangible Assets 400.3 452.8 527.7 584.3 695
Property, plant and equipment 4,834.00 4,722 4,662.20 4789.9 5,033.70
Investment property 24.8 22.4 16 15.9 15.8
Investment in Joint ventures 13.8 11.5 13 14.4 15.5
Other financial assets 3 3 3 3 3
Retirement benefit asset 0 0 182.6 91.3 206.1
Trade and other receivables 336.8 287.7 276.1 270.2 265.4
Derivative financial instruments 254 132.9 21.8 44.2 65.3
Deferred tax assets 1.6 0.7 0 0 0
Total Fixed Assets 5868.3 5633 5702.4 5813.2 6299.8
Current Assets
Inventories 536 613.2 685.3 681.9 767.3
Other financial assets 53.1 171.7 215.9 260.5 16.9
Trade and other receivables 285.2 281.4 250.3 253 245
Derivative financial instruments 92.6 48.1 18.4 67 42.5
Current tax assets 0 0 1.6 1.6 3.1
Cash and cash equivalents 422.9 405.8 470.2 196.1 193.1
Total Current Assets 1389.8 1520.2 1641.7 1460.1 1267.9
Liabilities
Current Liabilities 2009 2010 2011 2012 2013
Trade and other payables 1,073.50 1,153.80 1,347.60 1,449.10 1,503.80
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Partnership liability - M&S pension scheme 71.9 71.9 71.9 71.9 71.9
Borrowings and other financial liabilities 942.8 482.9 602.3 327.7 558.7
Derivative financial instruments 76.2 27.1 50.7 60.5 13.7
Provisions 63.6 25.6 22.7 8.4 19.2
Current Tax liabilities 78.9 129.2 115 87.8 71
Total Current Liabilities 2,306.90 1,890.50 2,210.20 2,005.40 2,238.30
Net Current Assets -917.10 -370.30 -568.50 -545.30 -970.40
Non-Current Liabilities
Retirement benefit deficit 152.2 366.5 14.1 13.3 13.1
Trade and other payables 243.8 280.3 262.3 280.8 292.1
Partnership liability - M&S pension scheme 68 0 0 0 550.7
Borrowings and other financial liabilities 2,117.90 2,278 1,924.10 1,948.10 1,727.30
Derivative financial instruments 3 0 37.5 27.2 13.1
Provisions 40.2 25.5 22 24 16
Deferred Tax liabilities 225.5 126.5 196.5 195.7 230.7
Total Non-Current Liabilities 2850.6 3076.8 2456.5 2489.1 2843
Net Assets 2,100.60 2,185.90 2,677.40 2,778.80 2,486.40
Capital & Reserves
Issued Share Capital 394.4 395.5 396.2 401.4 403.5
Share Premium Account 236.2 247.5 255.2 294.3 315.1
Capital redemption reserve 2,202.60 2,202.60 2,202.60 2,202.60 2,202.60
Hedging reserve 62.6 11.6 -11.3 14.8 9.20
Other reserve
2009-
6,542.20
2010-
5,970.50
2011-
6,042.40
2012-
6,114.30
2013-
6,542.20
Retained Earnings 5,728.10 5,281.90 5,873.20 5,991.40 6,117.20
Equity Shareholders Funds 2,081.70 2,168.60 2,673.50 2,790.20 2,505.40
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Equity Minority Interests -18.9 -17.3 -3.9 -11.4 -19
Total 2,100.60 2185.9 2677.4 2,778.80 2,486.40
Share Price 317.25 370.2 338.9 379.00 390.00
Number of share in issue 1,573.20 1,572.20 1,577.10 1,579.30 1,599.70
Marks & Spencers Ratios
Ratio 2009 2010 2011 2012 2013
EPS Basic (p) 10.00 7.50 9.10 9.80 10.20
Creditor Payment Period (Days) 101.40 98.09 93.32 99.49 101.02
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Current Ratio (?:1) 0.88 0.41 0.59 0.63 0.63
Debtor Collection Period (Days) 13.05 12.64 11.91 12.34 12.52
Dividend Per Share (p) 4.30 - 3.00 3.30 3.40
Dividend Yield (%) 5.41 - 4.35 2.83 3.37
Du Pont 3 Point Basic ROE (%) 0.22 0.19 0.18 0.19 0.17
Du Pont 5 Point Basic ROE (%) - - - - 0.17EPS Growth Rate (%) 11.11 -25.00 21.33 7.69 4.08Gross Gearing (%) 80.09 75.88 67.32 68.39 56.10
Gross Profit Margin (%) 13.83 13.26 13.43 13.56 13.59
Inventory Turnover (Times) 7.07 7.18 6.89 6.71 6.38
Net Profit Margin (%) 4.40 4.58 5.30 5.62 5.60
P/E ratio (p) 7.95 7.83 7.57 11.90 9.90
Quick Ratio (?:1) 0.44 0.14 0.14 0.17 0.15
Return on Cap Employed (ROCE) 7.92 13.94 12.31 11.60 11.07
Return on Equity (ROE) (%) 22.36 19.27 17.77 18.96 17.18
Du Pont 3 Point ROE Breakdown 2009 2010 2011 2012 2013
Net Profit Margin 0.06 0.05 0.06 0.05 0.05
Total Asset Turnover 1.25 1.33 1.33 1.37 1.32
Gross Leverage 3.46 3.27 2.74 2.62 3.04
2015
Forward Price/Earnings Ratio 26.46
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Ratio FormulasRatio Formula
Creditor Payment Period (days) (Trade Payables / Cost of Sales) * 365
Current Ratio (Current Assets) / Current Liabilities
Debtor Collection Period (days) (Trade Receivables / Turnover) * 365
Dividend Per Share (p) Dividend Paid / Number of Issued Ordinary Shares
Dividend Yield (%) (Dividend per share/Share Price)*100
Du Pont 3 Point Basic ROE (Net Profit / Sales) * (Sales / Total Assets) * (Total Assets / Total Equity)
Du Pont 5 Point Basic ROE (PAT / PBT) * (PBT / PBIT) * (PBIT / Revenue) * (Revenue / Total Assets) * (Total Assets / Total Capital Employed)
EPS Growth Rate (%) (Current Year's EPS - Previous Year's EPS) / Previous Year's EPS) * 100
Gross Gearing (financial ratios) (%) (Total Liabilities / Total Assets) * 100
Gross Profit Margin (Net profit / Turnover)*100
Inventory Turnover Turnover / Inventories
Net Profit Margin (Net profit / Turnover)*100
P/E ratio (P) Market Price Per Share/Earnings Per Share
Quick Ratio (Current Assets - Inventory) / Current Liabilities
Return on Cap Employed (ROCE) (Pre-Tax Profit / Fixed Assets - Net Current Assets) * 100
Return on Equity (ROE) (Profit after Tax / Total Equity) *100
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Debenhams Calculations
Ratio Calculation 2013 Figure
Dividend Yield (%) (3.40/101)*100 3.37
Return on Equity (%) (127.90/744.40)*100 17.18
EPS Growth Rate (%) (10.20-9.80)/(9.80)*100 4.08
Return on Capital Employed (%)
(154)/(1662.31-271.40)*100 11.07
Net Profit Margin (%) (127.9/2282.20)*100 5.60
Gross Profit Margin (%) (310.10/2282.20)*100 13.59
Inventory Turnover (Times) (2282.20/357.9) 6.38
Debtor Collection Period (Days)
(78.3/2282.20)*365 12.52
Creditor Payment Period (Days)
(545.80/1972.10)*365 101.01
Current Ratio (?:1) (470.5/-271.40) 0.63
Quick Ratio (?:1) (470.5-357.9)/(741.90) 0.15
DU Pont Basic ROE (0.06*1.07*2.87) 0.17
Gross Gearing Ratio (646.50+741.90)/(470.50+1662.30)*100 65.10
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Next Calculations
Ratio Calculation 2013 Figure
Dividend Yield (%) (92/4059)*100 2.27
Return on Equity (%) (508/285.70)*100 177.80
EPS Growth Rate (%) (320.10-282)/(282)*100 13.51
Return on Capital Employed (%)
(665.90)/(685.90+1207.8)*100 61.79
Net Profit Margin (%) (508/3562.80)*100 14.26
Gross Profit Margin (%) (1125.80/3562.80)*100 31.60
Inventory Turnover (Times) (3562.80/331.80) 10.74
Debtor Collection Period (Days)
(718.1/3562.80)*365 73.57
Creditor Payment Period (Days)
(537.20/2437)*365 80.46
Current Ratio (?:1) (1207.80/816) 1.48
Quick Ratio (?:1) (1207.80-331.80)/(816) 1.07
DU Pont Basic ROE (0.14*1.89*6.63) 1.78
Gross Gearing Ratio (792+816)/(685.8+1207.80)*100 84.91
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Marks & Spencers Calculations
Ratio Calculation 2013 Figure
Dividend Yield (%) (17/390)*100 4.36
Return on Equity (%) (458/2508.40)*100 18.42
EPS Growth Rate (%) (29.20-32.50)/(32.50)*100 -10.15
Return on Capital Employed (%)
(564.30)/(6299.80-970.40)*100 10.59
Net Profit Margin (%) (458/10026.80)*100 4.56
Gross Profit Margin (%) (3796.50/10026.80)*100 37.87
Inventory Turnover (Times) (10026.80/767.30) 13.07
Debtor Collection Period (Days)
(245/10026.80)*365 14.35
Creditor Payment Period (Days)
(1503.80/6230.30)*365 88.10
Current Ratio (?:1) (1267.90/2238.30) 0.57
Quick Ratio (?:1) (1267 0.22
DU Pont Basic ROE (0.05*1.32*3.04) 0.18
Gross Gearing Ratio (2843+2238.30)/(1267.90+6299.80)*100 67.14
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Du Pont 5 Point Scores
Calculation Figure
Debenhams (127.9 / 154) * (154 / 169.5) * (169.5 / 1662.3 + 470.5) * (2282.20 / 1662.3 + 470.5) * (1662.3 + 470.5 / 744.40)
17.18
NEXT (508 / 665.90) * (665.90 / 694.90) * (694.90 / 3562.80) * (3562.80 / 685.80 + 1207.80) * (685.80 + 1027.80 / 285.60)
177.87
Marks & Spencer (458 / 564.30) * (564.30 / 782.50) * (782.50 / 10026.80) * (10026.80 / 6299.80 + 1267.90) * (6299.80 + 1267.90 / 2486.40)
18.42
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Altman Z-Scores 2014
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Value Debenhams NEXT Marks & Spencers
X1 (748.01-1179.49) / 3390.78 = -0.13
(1468.1 – 834.5) / 2144.6 = 0.30 (1941.65 – 3427.72) / 11589.13 = -0.13
X2 103.18 / 3390.28 = 0.0304 1906.9 / 2144.6 = 0.89 9367.84 / 11589.13 = 0.81
X3 (244.83 + -17.33) / 3390.78 = 0.07
(695.2 + -25.30) / 2144.60 = 0.31 (864.17 + -191.88) / 11589.13 = 0.06
X4 1609.61 / 2207.31 = 0.73 10084.85 / 1858.40 = 5.43 12668.30 / 7781.47 = 1.63
X5 3628.30 / 3390.78 = 1.07 3740 / 2144.60 = 1.74 15354.98 / 11589.13 = 1.32
Score 1.62 7.63 3.47
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Forward Price/Earnings Ratio (2015)
Debenhams NEXT Marks & Spencers
Price/Earnings Value 101 / 10.75 = 9.40 4059 / 16.48 = 246.3 390 / 14.74 = 26.46
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Glossary
The definitions of ratios definitions are provided solely by Weetman (2010) so as to give understanding and consistency in interpretation of results.
Return on Equity Ratio
This ratio attempts to isolate the return earned on shareholder’s funds (Weetman 2010).
Inventory Turnover
The inventory turnover ratio measures the average period during which stocks are held before being sold or used in the operations of the business
(Weetman 2010).
Current Ratio
The current ratio calculates the proportion of current assets to current liabilities (Weetman 2010).
Quick Ratio
The quick ratio attempts to discover if the company has enough cash or cash assets with the exclusion of stock (Weetman 2010).
Trade Receivables Collection
The trade receivables collection ration measures the average period of credit allowed to credit customers (Weetman 2010).
Trade Payables Period
This ratio gives an indication of the length of time it is taking the company to pay its creditors (Weetman 2010).
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Basic Gearing Ratio
The basic gearing measures the contribution of long lenders, in the long term structure of the company (Weetman 2010).
Earnings per Share – (EPS)
The earnings per share ratio, signifies how much retained earnings the shareholder receives per share (Weetman 2010).
Gross Profit Margin
Indicates how much more a firm is charging for its products or services than they cost to purchase or produce (Weetman 2010).
Net Profit Margin
The net profit margin gives an indication of the percentage of sales value that the firm has retained as profit (Weetman 2010).
Return on Total Capital Employed
This ratio investigates compares the amount of profit achieved against the amount of funds invested to earn that profit (Weetman 2010).
Du Pont Basic
Du Pont analysis allows for the investigation of the components that make up return on equity in terms of operating efficiency, asset use efficiency and
financial leverage (Weetman 2010)
Dividend Yield
This ratio reveals the percentage cash return for each share held (Weetman 2010).
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