Debenhams (LSE: DEB) is a household name department store group with the market-cap of an AIM minnow, just £64m. That’s a fraction of its 2006 flotation price of £1.7bn, when shares were priced at 195p. Today, you can buy them for just 5.26p. Should you?
Not my department
Debenhams is company reviled, just like billionaire part-owner Philip Green. Edward Sheldon recently said he wouldn’t touch it with free money. Green has sinned but the high street is in general meltdown, and the department store model is looking broken.
The stock is down another 7.62% this morning following publication of a Christmas trading update that showed group like-for-like sales down 3.4% in the six weeks to 5 January, and by 5.7% measured over 18 weeks. Weak store footfall was offset by growth in digital, though, with sales up 4.6% over 18 weeks. Optimists will note that Debenhams failed to issue its traditional Christmas profit warning.
Today’s update blamed the volatile and challenging UK trading environment, as all retailers do these days. This forced Debenhams into “tactical promotional activity in order to be competitive,” slashing prices in other words, which will erode first-half margins.
Debenhams said it continues to generate cash and has cut net debt from £321.3m to £286m, comfortably within committed debt facilities of £520m. It’s looking to refinance existing bank facilities within the next year, and bring in new sources of funding after turning down Ashley’s offer of a loan. An annual £50m of planned savings will be upped to at least £80m.
On the rack
Investors clearly aren’t pinning too much faith on management’s claim that it remains “on track to deliver current year profits in line with market expectations, supported by further identified cost savings.” Analysts are forecasting an 81% drop in earnings in the year to 31 August 2019, although 66% growth the year after. There is no dividend.
Management has so far failed to convince the market that it has a strategy to turn things round. In contrast to Sheldon, I would invest with free money, just not my own.
Nostrum Oil & Gas (LSE: NOG), an independent oil and gas company focused on the pre-Caspian Basin, has also had a rough time of it lately. It’s falled 51% in three months, yet still boasts a far larger market-cap than Debenhams at £217m.
Nostrum has fallen despite making encouraging progress in its operational activities, with sales volumes rising due to the successful testing of site Well 40, while announcing the mechanical completion of the GTU3 project on 24 December, with the facility set to be commissioned this year.
The falling oil price undermined the good news, although investors have been boosted by the recent rally, and Nostrum is up 10% in the last week.
The explorer’s financial results for the nine month to 30 September showed revenues creeping up 2.5% to $311.4m, and net operating cash flows rising 9.4% to $187.7m. Cash stood at $102.4m against total debt of $1.1bn. City analysts are optimistic, forecasting 43% growth in earnings this year, and 23% in 2020. It’s clearly risky, but I would buy it ahead of Debenhams.
harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.