Is There More Trouble Ahead for Debenhams (DEB)?

  • Mar 04, 2019 GMT
  • Team Kalkine
Is There More Trouble Ahead for Debenhams (DEB)?

Overview

Debenhams PLC (Ticker symbol: DEB) traces back its roots to 1778 when William Clark established it in London. In 1905 Debenhams Ltd was incorporated and by 1950, it was the biggest departmental store group in the UK. From 1985 to 1998, the company was part of the Burton Group, and after separating from Burton Group, Debenhams was listed on the London Stock Exchange until 2003 when Baroness Retail Ltd acquired it and finally made a comeback to London Stock Exchange in May 2006. Today, the company is a leading multinational, multi-channel brand with over 241 stores across 22 countries. The current interim Chairman is Terry Duddy, who replaced Ian Cheshire and the current Chief Executive is Sergio Bucher. 

Segments and Products

The company’s operations are divided into two segments: UK and International. Although the company sources most of its revenue from the UK, the company’s growth comes from its international market only. Through 240 department store and online presence in more than 90 countries, the companies offer a mix of own brands, international brands and concessions. In the UK, the company is amongst the top five according to market share in womenswear and menswear and top ten in children-wear. It is also the market leader in premium health and beauty. The company employees 26,000 colleagues worldwide to serve around 19 million customers. The company also has a localised online service in many overseas markets, and in the UK, the website is one of the top online retail destinations with over 300 million visits each year.

Recent Downturn

The company recently scrapped its dividend as it reported a loss of almost £492 million in the year ending September, a period in which its same-store sales also fell 2.3 per cent. It also plans to close up to 50 stores, putting 4000 jobs at risk, and revisit the existing rental agreement. The company's latest poor performance came at the time of weak wage growth and economic uncertainty in the UK. The company's rivals have also been performing poorly, signalling a downturn in the whole market. The company has been working on a new store concept designed to entice shoppers back to the store from the online marketplace with decent success till now. The company has undergone forced makeover at the top with two major shareholders - Mike Ashley's Sports Direct and Middle Eastern investor Landmark Group – targeting the Chief Executive and the Chairman after a drop in Christmas sales. There are concerns in the market about the company's confession that banking facilities will have to be refinanced within the next 12 months. Moody's has also cut its credit outlook to negative from stable.

Key Financial Metrics (FY 18, in £m)

(Source: Company Filings)

Financial Results (FY 18)

  • The gross transaction value was reported at £2,900.4 million and Statutory revenue at £2,277.0 million.
  • The group’s like-for-like sales movement fell by 2.3% over the past year.
  • EBITDA reported was £157.3 million, a decline of 27.5% vs 2017 and operating profit fell by 59.6% to £43.4 million.
  • Underlying profit before tax fell by 65.1% to £33.2 million.
  • Reported loss before tax was £491 million, falling from a profit of £59 million a year earlier.
  • Underlying EPS was 2.2p vs 6.4 last year with DPS falling from 3.425p to 0.5p.
  • Net debt has increased to £321.3 million from £275.9 million.

Ratios

(Source: Thomson Reuters)

Ratios Commentary

  • The same store sales decreased by a large margin in 2018, with a decrease in the number of stores as well.
  • The profitability also walloped in 2018, with operating and net margin now in red territory. The company has reported a negative return on equity, further highlighting the plight of the company's operations.
  • The company’s liquidity position has remained stable over the years.
  • More debt was taken in the financial year 2018.

Share Price Commentary

  • On 1st March 2019, DEB shares closed at GBp 3.14, up by 1.23 per cent against its previous day closing price.
  • Stock's 52 weeks High and Low is GBp 29.03/GBp 2.60. At the closing price, the share was trading 89.18 per cent lower than its 52w High and 20.77 per cent higher than its 52w low.
  • Stock’s average traded volume for 5 days was 8,494,339.20; 30 days - 20,013,298.53 and 90 days - 17,710,407.27. The average traded volume for 5 days was down by 57.56 per cent as compared to 30 days average traded volume.
  • Debenham’s one-year stock performance declined significantly by 88.72%, and on a year-to-date basis, shares were down by 38.79% respectively.
  • The company’s stock beta was 0.99, reflecting relatively same directional movement of the stock with the benchmark index.
  • Total outstanding market capitalisation was around £ 58 million.

Challenges and Prospects

  • The UK exiting European Union may create substantial headwinds for the company. It may result in foreign exchange rate volatility, lead to delays at ports, or changes to trade agreements and duty rates.
  • Transition in consumer choices towards online shopping and away from traditional stores is hugely impacting sales.
  • A decline in discretionary purchases is leading to a reduction in profits.
  • Borrowing costs have increased due to fear amongst creditors and downgrade by rating agencies, further straining the financials.
  • Record low levels of unemployment may lead to increased wage growth, fueling purchases for discretionary goods.
  • Restructuring and selling-off of unprofitable stores may lead to decreased costs, leading to better margins.

Conclusion

The prospects of the company look a bit bleak; the company's stock is already trading near its 52-week low and has been falling for the past year. The company faces an immediate threat from disruptions from Brexit and consumers' transition towards online-marketplace. The market should keep a cautious watch on the Debenhams stock going ahead.

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