Today’s Falling Knife: Debenhams plc Drops 7%

Debenhams (LSE: DEB), the fashion clothing, accessories and cosmetics retailer with 239 stores in 28 countries, today released final results for the year to 31 August 2013.  

Like-for-like sales rose 2% with the gross transaction value of total sales rising 2.5% to £2,777m.  International sales, while smaller, at £552m grew at a more promising rate of 3.7%.  Investors keep a keen eye on Debenhams’ online sales and will be heartened to see an increase of 46% to £366m.  Indeed, online sales, now in 67 countries, accounted for 13% of total sales, up from 9% in the previous year.

Despite this modest increase in revenues, group profits before tax fell by 2.7% to £154m.  However, due to a continuation of the share buyback policy using £40m of spare cash flow the earnings per share actually increased by 4.1% to 10.2 pence.  Even with this use of surplus cash, net debt only rose by £4m to a very manageable £372m.  The directors announced a final dividend of 2.4 pence per share bringing the total dividend for the year to 3.4 pence per share, an increase of 3%.

Commenting on the results, Michael Sharp, Chief Executive, said:

“I am pleased with our performance in 2013 given the very difficult conditions.  We gained market share in key categories, demonstrating the competitiveness of our product offer.   We continue to deliver growth and additional customer benefits through our strong multi-channel capabilities. 

“At the same time, we are working hard to ensure our UK stores adapt to the challenge of their changing role in a multi-channel world…..whilst consumer confidence may be showing signs of improvement, we expect that household incomes will remain under pressure from inflation growing ahead of wages. With this in mind, we remain cautious about the strength and pace of any consumer recovery in 2014 and expect the marketplace to remain highly competitive.”

Debenhams have opened stores in Chesterfield and Lichfield and transformed their flagship Oxford Street store in a modernisation program encompassing 12 other stores so far with the remaining 19 stores over the next 2 years.  In addition to this, 16 new stores are targeted to open over the next 4 years with 4 in 2014.

Overall, Debenhams does have a good debt position and progressive dividend policy but is still to completely convince investors that its transition to the online world will result in sufficient future growth.  Earnings per share growth has not been in double digits for some years and that has held the price-to-earnings multiple down under 11 times.  Investors initial reaction is disappointment with a 7% drop in the share price, but this could present an opportunity to get in on a growth story.

With a share price rising just 10% since 2009 in a bullish market Debenhams has been left behind.  Is now the time to invest?  It is certainly worth some further investigation.

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> Barry does not own shares in Debenhams. The Motley Fool has recommended shares in Debenhams.