Debenhams

Download full report (6.4mb PDF) Annual Report and Accounts 2012

Note: The Financial Statements for the period ended 3 September 2011 included 53 weeks. Therefore all comparative income statement numbers for the 2011 financial year relate to the 52 weeks of trading to 27 August 2011. Management believes that comparing like-for-like 52 week periods demonstrates the underlying performance of the business. Comparative cash flow numbers reflect the full 53 weeks to 3 September 2011 and the comparative balance sheet is also at this date.

Sales and profit performance

Debenhams delivered a good performance in 2012 given the challenging market conditions. Key financial metrics are summarised in figure 1 whilst our key performance indicators are described in detail on page 6.

Figure 1: Financial summary

52 weeks to
1 September
2012
52 weeks to
27 August
2011
53 weeks to
3 September
2011
Gross transaction value – Group £2,708.0m £2,639.5m £2,679.3m
Gross transaction value – UK £2,204.6m £2,149.5m £2,181.1m
Gross transaction value – international £503.4m £490.0m £498.2m
Like-for -like sales exc VAT 1.6% n/a n/a
Revenue – Group £2,229.8m £2,176.4m £2,209.8m
Revenue – UK £1,860.3m £1,823.1m £1,850.6m
Revenue – international £369.5m £353.3m £359.2m
Operating profit – Group £175.0m £175.0m £183.7m
Operating profit – UK £144.3m £149.1m £156.2m
Operating profit – international £30.7m £25.9m £27.5m
Net interest £16.7m £23.1m £23.4m
Profit before tax £158.3m £151.9m £160.3m
Basic earnings per share 9.8p 8.6p 9.1p
Diluted earnings per share 9.8p 8.6p 9.1p
Dividend per share 3.3p 3.0p 3.0p

Group

The Debenhams brand trades through 239 stores in 28 countries and online in 67 countries.

The total trading space of owned stores as at 1 September 2012 was 12,521,000 sq ft, an increase of 78,000 sq ft (0.6%) during the course of the year.

Group gross transaction value increased by 2.6% to £2,708.0 million for the 52 weeks to 1 September 2012 (2011: £2,639.5 million). Group revenue increased by 2.5% from £2,176.4 million to £2,229.8 million. Group like-for-like sales grew by 2.3% including VAT and by 1.6% excluding VAT.

Group gross margin decreased by 30 basis points during the year due to a largely weather-related sales mix change towards health & beauty, which has a lower gross margin than own bought clothing, and to higher concession sales. The promotional calendar was largely unchanged from last year as stocks were very tightly controlled across the business given the difficult market conditions.

Profit before tax for the year increased by 4.2% to £158.3 million (2011: £151.9 million). The use of “headline profit before tax” was discontinued during 2012 as the quantum of the amortisation of capitalised bank fees which constituted the difference between the reported and headline metrics has become small enough that the distinction is no longer necessary.

Profit after tax increased by 12.8% to £125.3 million, largely due to both lower taxation and interest as detailed on page 37.

Basic earnings per share for 2012 were 9.8 pence (2011: 8.6 pence) and diluted earnings per share were 9.8 pence (2011: 8.6 pence).

Segmental performance

Debenhams is adopting a new segmental analysis which better represents the way we manage the Group. This will provide sales and operating profit information for two segments: UK and international. Each segment represents the performance of one pillar of the four pillar Debenhams’ strategy. The UK segment will reflect the performance of “Focusing on UK retail”, while the international segment will reflect “Expanding the brand internationally”. The results of the pillar “Improving choice and availability through multi-channel” are split between the two segments based on customer location.

UK

The UK segment comprises 154 stores in the UK plus online deliveries to UK customers. During the year we opened two new stores and modernised 18.

UK gross transaction value increased by 2.6% to £2,204.6 million for the 52 weeks to 1 September 2012. Revenue increased by 2.0% to £1,860.3 million.

Sales growth in the UK was driven by a number of factors.

EBITDA for the UK segment decreased by 0.2% to £224.8 million. UK operating profit for the UK segment decreased by 3.2% to £144.3 million, largely as a result of higher depreciation.

International

The international segment represents 85 stores, comprising 11 Debenhams stores in the Republic of Ireland, six Magasin du Nord stores in Denmark, the 68 international franchise stores and online sales to customers outside of the UK. During the year we opened seven franchise stores including two new markets and closed three stores.

International gross transaction value increased by 2.7% to £503.4 million. Revenue increased by 4.6% to £369.5 million.

The key drivers of international sales growth during the year were:

EBITDA for the international segment increased by 10.8% to £42.0 million. Operating profit for the international segment increased by 18.5% to £30.7 million. Improved profitability was driven by higher sales.

Group costs

Ensuring the business has an appropriate and well-controlled cost base continues to be an important area of focus and we maintain very strong cost management disciplines across all areas of the business. The main cost categories are described in terms of their percentage of gross transaction value.

Depreciation

Group depreciation and amortisation of £91.6 million increased by 1.7% versus last year (2011: £90.1 million) as they begin to reflect increased investment in capital expenditure.

Financing income and expense

The net interest cost of £16.7 million for the 52 weeks to 1 September 2012 represented a decline of 27.7% from last year (2011: £23.1 million). This reflects the lower interest rate associated with the refinancing of the senior credit facility in July 2011 and a reduction in the Group’s level of debt.

Taxation

The Group’s tax charge of £33.0 million on a profit of £158.3 million gave an effective tax rate of 20.8% compared with 26.9% for the prior year. The decline in effective rate is in part due to reductions in the headline rate of corporation tax (accounting for 2.0% of the 6.1% nominal decrease) with the balance largely due to the resolution of historical issues net of current year contingencies.

Earnings per share

Total basic and diluted earnings per share were 9.8 pence, compared with 8.6 pence for the 52 weeks to 27 August 2011. The weighted average number of shares in issue in 2012 was 1,281.3 million (2011: 1,286.5 million).

Cash flow and uses of cash

Debenhams remains a highly cash generative business and has clear priorities for the uses of cash which are:

  1. Invest in the business to support the four pillars of the strategy
  2. Grow dividend cover in line with maintaining dividend cover of three times earnings
  3. Move towards one times net debt to EBITDA over the medium-term
  4. Return surplus cash to shareholders through a long-term share buyback programme

Cash flow generation, the uses of cash and the movement in net debt are summarised in figure 2.

Operating cash flow before financing and taxation was £141.1 million. We used this cash to pay taxation of £44.6 million and financing of £13.6 million. Payment of the 2011 final dividend and 2012 interim dividend accounted for £38.5 million. A further £20.1 million was spent on share buybacks.

Figure 2: Cash flow and uses of cash

52 weeks to
1 September
2012
53 weeks to
3 September
2011*
EBITDA £266.8m £272.2m
Working capital £(7.1)m £(22.6)m
Proceeds from sale of fixed asset investments £5.0m
Capital expenditure and investments £(118.6)m £(114.0)m
Operating cash flow before financing and taxation £141.1m £140.6m
Taxation £(44.6)m £(48.6)m
Financing £(13.6)m £(25.6)m
Dividends paid £(38.5)m £(12.9)m
Share buyback £(20.1)m -
Other £(9.3)m £79.6m
Change in net debt £15.0m £133.1m
Opening net debt £383.7m £516.8m
Closing net debt £368.7m £383.7m

*Adjustment for property sales and leaseback transactions

Capital expenditure

Capital expenditure during the year was £118.6 million, an increase of 4.0% versus the previous year (2011: £114.0 million). The key components of capital expenditure are detailed in figure 3 as is guidance for capital expenditure in 2013.

Figure 3: Capital expenditure

Dividends

An interim dividend of 1.0 pence per share was paid to shareholders on 6 July 2012. The board is recommending a final dividend of 2.3 pence per share (2011: 2.0 pence) which will be paid to shareholders on 11 January 2013, taking the total dividend for the year to 3.3 pence (2011: 3.0 pence).

Share buyback programme

In October 2011 the board announced that as it could see no benefit in leverage below 1 times EBITDA, it intended to commence a long-term share buyback programme as leverage approached this 1 times. It was subsequently announced at the interim results in April 2012 that this programme would commence with the initial purchase of £20 million of shares during the following six months. This was duly completed by the end of August 2012. The total number of shares bought was 23.6 million, consuming £20.1 million of cash. These shares are currently held as treasury shares.

Net debt

The Group's net debt position as at 1 September 2012 was £368.7 million (3 September 2011: £383.7 million), a reduction of £15.0 million during the course of the year after the share buyback. As a consequence the ratio of reported net debt to EBITDA remained at 1.4 times.

Balance sheet

Key balance sheet items are summarised in figure 4.

Reported net assets were £661.0 million representing an increase of £1.4 million from the Balance Sheet at 3 September 2011.

Figure 4: Balance sheet

1 September 2012 3 September 2011
Intangible assets £864.9m £858.1m
Property, plant and equipment £661.6m £634.6m
Inventory £332.3m £321.3m
Other assets £105.2m £95.6m
Trade and other payables £(525.4)m £(489.1)m
Other liabilities £(370.1)m £(382.7)m
Retirement benefit (obligations)/assets £(57.3)m £3.9m
Deferred tax assets/liabilities £18.5m £1.6m
Net debt £(368.7)m £(383.7)m
Reported net assets £661.0m £659.6m

Inventory

Stock levels continued to be managed very tightly during the year given the difficult market conditions. Store stock levels were flat on the prior year whilst stock levels in the online and international businesses increased in line with growing demand. As a result, total stock increased by 3.4% to £332.3 million. Terminal stock at year end of 2.6% was in line with the long-term average.

Pensions

The Group provides a number of pension arrangements for its employees. These include the Debenhams Retirement Scheme and the Debenhams Executive Pension Plan (together the “Group’s pension schemes”) which closed for future service accrual from 31 October 2006. Under IAS 19, the Group’s pension schemes’ deficit as at 1 September 2012 was £57.3 million (3 September 2011: £3.9 million surplus). Further information can be found in note 23 to the Group financial statements starting on page 107.

Future pension arrangements will be provided for Debenhams’ employees by a money purchase stakeholder plan or defined contribution pension schemes.

During March this year the triennial actuarial valuation was completed and discussions with the pension fund trustees were concluded. The contributions from the Company and the investment strategies devised by the trustees are intended to restore the schemes to a fully funded position on an ongoing basis by the end of March 2022 (Debenhams Retirement Scheme) and August 2021 (Debenhams Executive Pension Plan). As a consequence of this agreed plan, annual contributions to the two funds were set at £8.9 million, rising each year in line with the RPI. The Company also pays the non-investment expenses and levies to the Pension Protection Fund.

Financial position

In July 2011, the Group refinanced its £650 million senior credit facility which has a maturity date of October 2015, with an option to extend further to October 2016. The facility comprises a £250 million term loan and a £400 million revolving credit facility.

The senior credit facility contains fixed charge cover and leverage covenants, which were both met in full during the year. The directors believe that the Group has sufficient headroom to ensure compliance for the foreseeable future.

Financing risk and treasury management

The board has established an overall treasury policy and has approved authority levels within which the treasury function must operate. Treasury policy is to manage risks within the agreed framework whilst not taking speculative positions.

The policies and strategies for managing financial risks are disclosed in note 21 of the Group financial statements starting on page 101.

Simon Herrick Chief Financial Officer

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Debenhams plc,
registered in England No. 5448421
Registered Office
1 Welbeck Street
London W1G 0AA

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Debenhams plc,
registered in England No. 5448421,
Registered Office,
1 Welbeck Street,
London W1G 0AA