Is Debenhams Plc A Buy After Today’s 15% Rise?

Debenhams (LSE: DEB) shareholders received a late Christmas present on Tuesday morning, when the firm’s stock rose by 15%.

The gains came after the firm said that like-for-like sales rose by 1.9% during the 19 weeks to 9 January, while online sales rose by 12.1%. Debenhams also said that its gross profit margin was expected to be flat or up to 0.5% higher for the full year. This suggests that sales growth has not been at the expense of price cutting.

Even Black Friday was a success, with Debenhams describing the event as having “traded successfully and profitably”.

A bargain share price?

The 15% gain seen this morning has recouped much of the stock’s recent losses. As I write, the shares are changing hands for about 75p, a level last seen in the middle of December.

However, anyone with a Foolish long-term view will see that Debenhams shares haven’t really made any progress over the last year. Twelve months ago, the share price was also 75p. Five years ago, the shares were worth 74p!

This range-bound performance means the market is constantly veering between optimism and pessimism about Debenhams’ future. This suggests that a successful turnaround and a more serious decline are both real possibilities.

Almost one year ago today, I wrote an article asking if Debenhams was a value buy. The question remains valid today, so let’s take a look at what has changed over the last year.

A catalyst for 2016?

Debenhams sales and profits have been pretty flat over the last couple of years. Earnings per share were 7.1p in 2014 and 7.6p in 2015. A figure of 7.6p is also expected for the current year, which ends on 29 August.

This puts Debenhams on a current year forecast P/E of 10, after today’s share price gains. On the face of it, Debenhams valuation seems to reflect a stagnant business that’s not really going anywhere. A potential value trap.

However, a catalyst for growth could be on the horizon. Debenhams’ chief executive, Michael Sharp, is expected to stand down in 2016 once the firm has appointed a successor.

Mr Sharp has been in the role for five years but hasn’t quite managed to find a successful formula for growth. It’s thought that a number of major shareholders were keen to see a change at the top.

Debenhams’ shares currently trade on 9.5 times 2016/17 forecast earnings and offer an attractive 5% dividend yield. Strong growth in online and click-and-collect sales suggests that Debenhams is managing to bridge the divide between the internet and high street.

The firm’s finances are reasonably sound. Net debt is about £300m and over the last five years, the firm has consistently generated enough free cash flow to fund its dividend and reduce debt levels.

If the firm’s new chief executive can find a way of delivering real growth, then Debenhams could be good value at 75p per share.

Ultimately, it’s your call.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.