investment report- debenhams 2014

“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

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%


- 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


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


- 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


- 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


- 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


- 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


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


- 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)


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

32

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


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.


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.


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.


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.


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.


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


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).


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.


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.


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.


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


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

6.0 ReferencesDewole, A., 2005. Developing a Strategic Framework for Efficient and Effective Optimisation of

Information in the Supply Chains of the UK Clothing Manufacture Industry, Supply Chain

Management: An International Journal, 10 (5), 357-366.

Altman, E. I., 2000. Predicting Financial Distress of Companies: Revisiting the Z-Score and Zeta

Models, Journal of Finance, 1, 1-16.

Armstrong, A., 2014. Sports Direct sells Debenhams Shares but Retains Presence with Put Option

[online]. Telegrath Finance. Available from:

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10576936/Sports-Direct-

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49

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


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


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



Taxation 126.50 141.30 150.50 145.30 157.90


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


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


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



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


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




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





Gross Leverage 11.35 12.69 7.71 8.33 6.63

2015


61

Marks & Spencers Income Statement 2009 2010 2011 2012 2013

62

£m £m £m £m £m


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


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



Taxation 199.4 179.7 182 168.4 106.3


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


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

64

Partnership liability - M&S pension scheme 71.9 71.9 71.9 71.9 71.9



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


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

65

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


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




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





Gross Leverage 3.46 3.27 2.74 2.62 3.04

2015


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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


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


(665.90)/(685.90+1207.8)*100 61.79

Net Profit Margin (%) (508/3562.80)*100 14.26




(718.1/3562.80)*365 73.57


(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


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


(564.30)/(6299.80-970.40)*100 10.59

Net Profit Margin (%) (458/10026.80)*100 4.56




(245/10026.80)*365 14.35


(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)


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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