Event in Progress:
View the latest research on other companies in the sector.
Debenhams announcement today that its guidance of full year profits (to August 2019) in line with market expectation no longer being supported by the company leaves the markets view of the company even more in limbo than it was previously in our view.
Debenhams
DEB has announced a new 12month £40m bank facility agreed with certain of its existing Revolving Credit Facility (RCF) lenders and Noteholders and waiver of some existing RCF covenants. This facility with a coupon of LIBOR +5% which can be increased during 2Q calendar 2019 as an incentive to complete a wider re-financing. It has also announced agreement in principle with Li & Fung to develop a strategic sourcing partnership.
Debenhams has reported Group LFL sales down 5.7% (same % change at constant currencies) for the first 18 weeks of the year. Within this, online sales grew by 4.6% implying UK in-store sales declined by nearly 10% LFL on our calculation. Market expectation was for Group LFL to decline by 2-3%. DEB’s UK in-store LFL decline was in our view similar to Next’s and worse than M&S’s Clothing & Home in-store LFL which have calculated at minus 6-7%. So Debenhams’ in-store sales performance was not materially out of line with those competitors. But it has compared badly with its online sales growth compared with M&S +14% and Debenhams +15% and on the basis of initial comments appears to have had to discount to a greater degree than them as well.
Debenhams’ turnaround strategy is based upon repairing the balance sheet, sweating its assets harder and then investing in growth areas in order to lay a path to sustainable, profitable growth. These are appropriate steps. However, there is much to be delivered. Store closure guidance will be tough to achieve, in our view, and the reduction in capex, which will lead to low spend relative to peers, could mean improving Debenhams’ competitive position in the marketplace becomes harder. We update our forecasts to reflect the self-help measures and guidance announced at the recent prelims, with slight EPS cuts in FY19E-20E, but an increase in FY21E as cost savings benefit. The targeted £350m incremental cashflow generation by FY20E could provide valuation support if achieved. We maintain our HOLD rating and target price of 10p.
The fact that the shares have not rebounded materially on well-trailed news that Debenhams has secured cash savings over two years equivalent to its current debt indicates continuing concern over nearterm volatility and reservations that there will be a medium term here.
FY18 underlying PBT of £33m (pre-guided) is in line representing a 65% fall year-on-year. The new news is that no final dividend will be paid (consensus was 0.6p) and additional cost saving and capex reduction measures have been announced that management expects to release cumulative cash flow of c.£350m by FY20E. Returns on new format stores over peak will inform roll-out plans, there will be an update on the store programme in April and the strategic asset review is ongoing. The significant action we have been asking for has clearly been announced and we are encouraged by the more aggressive restructuring strategy to reposition the business. The release of £350m by FY20E, if delivered, could underpin the current valuation. There is a lot of detail to go through, but we are encouraged by today’s announcement and the potential for future cash flow improvement suggests a HOLD is now warranted after a share price fall of 75% YTD.
This was an odd occasion heavily attended for what has become a small company by capitalisation. The sign-up for this store was four years ago and the lease term 25 years (we believe with some break provisions). The applicability of some of what was seen was limited across the broader estate and the management present were sufficiently new in many cases that they will not have been involved in buying or conceiving much of what was presented. The store presentation appeared to be to a high standard. But there remained inconsistencies in presentation and the clothing product continues to lack differentiation in our view. The company referenced a store review that suggests that the current putative 10 store closure programme may grow and also disclosed a seemingly wide organisational review that will result in material but unquantified central cost savings. We would like to see more of a gamechanger digital/social media strategy to give credibility to the online side of the equation. But Debenhams is having to move faster across a wider range of areas needing improvement than it has probably ever had to do. So it is inevitable that there will be some un-even strategy development and delivery. Overall we expect that cost savings may be enough to reassure investors that Debenhams can live to fight another day over the peak 2018 period.
Yesterday at Debenhams’ new Watford store, we got a flavour of the progress being made under the ‘Destination, Digital, Different’ pillars of its new strategy. The changes are positive, but we question the affordability of a transformation across the entire store estate. Turning c.12m sq ft into ‘destination’ space is tough and it is our view that much more drastic action is needed to materially right-size the store estate for sustainable long-term profit growth. Structural challenges continue to persist and we see the company as a value trap. We reduce our forecasts in line with company’s guidance earlier in the month, noting that the change is already reflected in the market price, with a flow through to outer years and reiterate our SELL rating with 10p target price.
Further UK market weakness has resulted in another profit downgrade and Debenhams (DEB) moving more overtly into a defensive mode. Our 8/18 PBT forecast (pre-exceptionals) has been reduced by 29% to £34m. The company expects to be able to grow profit from its guided 8/18 level of £35-40m. But there is clearly above average uncertainty attaching to its forecasting because of its record in these matters and macro.
Continued weak trading has led Debenhams to issue a 25% profit warning. This comes on top of the already 50% cut to our estimates over the last 12 months and highlights the ongoing structural pressures that we do not expect to abate. Management is seeking further cost savings and will now materially reduce capex next year. While this may give balance sheet protection it is unlikely to help close the gap vs. the competition. No change to our view and we lower our target price to 10p (from 15p). We continue to see Debenhams as a value trap. SELL.
Having sat on the fence as Debenhams has struggled through a very difficult Autumn/Winter sector-wide we now believe there are grounds for a more positive view.
We cut our FY18E and FY19E PBT estimates by c.5% following the interims. For FY18E, we now stand at £48.0m, which is below management's ‘low end of £50m-£61m guidance’ and below where we think the new consensus will form. There is pressure on H2 to hit our numbers. We acknowledge the progress under the ‘Destination, Digital, Different’ pillars of the Debenhams Redesigned strategy, but we have yet to see this feed into the group's financial performance and visibility still remains low. As a mid-market, more traditional player Debenhams is exposed to ongoing structural challenges and increasing levels of competition. We reiterate our SELL recommendation.
1H Results: PBT £42.2m v consensus £44m (2016/17), PBT guidance reduced to bottom and consensus (£50-61m) v previous range £55-65m (2016/17 £95m), modernisation programme accelerated. Regard this mix as positive against apocalyptic expectation expect share price bounce.
H1 18 PBT is at the lower end of expectations, following the profit warning in January. Net debt increased, given the lower profits. Consensus could fall 10% and we are reassessing our numbers but there is clear downside risk. This raises questions around debt covenants. Matt Smith, CFO, is departing and the search for a successor is underway. Revenue visibility is low due to the high operational gearing. Debenhams is investing just to stand still and is acutely exposed to the ongoing structural challenges in the market. We reiterate our SELL recommendation and reduce our TP to 20p (from 25p).
Following the pre-announcement of its Christmas trading we have cut our DEB PBT estimates for 2017/18E, 2018/19E and 2019/20E by 33%, 28% and 28% respectively. We have also cut our DPS estimates for these years by 35%, 25% and 22%.to achieve 2x cover in 2018/19E.
Debenhams becomes the first Profit Warning of 2018 guiding 8/18 PBT to £55-65m around 20% below consensus at the mid-point. This highlights the operational gearing here with the main financial variance being a 150bps 1H gross margin decline against previous guidance for Full Year gross margin to fall 25bps. This has resulted from tactical promotion to maintain clean stock and weaker than expected start to the Clearance Sale.
The conference call to analysts/investors this morning provided little comfort. Our concerns around the security of the dividend are real and clarity here will come at H1 reporting (April). At this stage, debt levels are not an immediate concern, but this is dependent on (i) trading performance and (ii) the level of capex required to support the transformation strategy. In an environment where digital, brands and those with a clear market position are generating superior rates of growth, the structural challenges facing more traditional retailers, particularly those such as Debenhams, are likely only to intensify.
Christmas trading is below expectations, which coupled with a significant decline in gross margin, leads to a 35% downgrade in our FY18E PBT. Our new forecasts of £52.1m is below guidance of £55m-65m PBT for FY18E and whilst the DPS remains covered by earnings it is uncovered by free cash flow. Ongoing structural challenges, a soft consumer environment, rising costs and increasing capex demands make for a difficult outlook, in our view. We reiterate our SELL and downgrade our TP to 25p.
Most interim numbers will be slightly better than consensus, helped by lower interest (where guidance is upgraded). Reducing net debt/gearing is also accompanied by a 2.5% DPS increase. Key strategic actions are gaining traction and, although FX translation headwinds have hampered reported international profits, this could begin to reverse now. Key concerns are unseasonal spring conditions in the clothing/footwear sector (albeit DEB exposure <50%) and uncertainty over recent/planned management changes, albeit the CEO search process is at an advanced stage and high quality names have been linked with the role. Given a low valuation the shares can still advance though.
Debenhams (DEB LN) Good strategic progress, interims slightly better than expected | Entertainment One Ltd (ETO LN) Takeover speculation | Lavendon Group (LVD LN) Solid start to FY’16, but we remain cautious on the Middle East | Renold (RNO LN) Year end guidance above market expectations | Scapa Group (SCPA LN) Trading ahead of expectations; Healthcare strong
DEB ETO LVD RNO SCPA
The market had been pricing a lot of negativity into today’s update on the back of difficult trading conditions in the run up to Xmas and evidence of weak trading amongst its large (and small) peers. Historically DEB didn’t have the flexibility in the cost line vs the likes of MKS and NXT. This meant increased dependency on LFL sales and margin performance - and today’s update is both positive in absolute terms and substantially better than the bears would have feared, putting the group on track to deliver FY PBT expectations, albeit these edged down in recent weeks. This performance confirms traction is increasing in the strategy. From a cal16 P/E of 8.2x (4.5x EV/EBITDA) we would expect a reasonable bounce today, making the shares at least a trading buy.
Yesterday’s fashion preview event provided another opportunity to assess Debenhams’ product development pipeline and it didn’t disappoint. Although only providing a snapshot of what lies ahead in 2016, the key take-away was positive and highlights widening appeal, improving mix and value in the Designers at Debenhams portfolio. This underlying value suggests to us the strategic refocus on promotions can yield further benefits. The stock looks oversold in our view having drifted back towards 80p, trading on a cal16 P/E of <10x (<5x EV/EBITDA). The yield is 4.3% and the recent final yields 3% and is available until 4th December. This weakness represents a trading buy opportunity.
Full year PBT/EPS came in a smidge better than expected with low single digit EBITDA/EBIT growth in H2 despite adverse FX. Although forecasts weren’t affected at the time we believe DEB did suffer a drag due to the awful A/W14 conditions in H1. Given guidance on margins and costs is in line with expectations, we would argue that there is some gas in the tank regarding consensus forecasts pending a successful A/W15 season. Trading has been encouraging so far in current trading. The boardroom shenanigans have resulted in the CEO announcing his retirement in 2016. By then the strategic initiatives should be bedded in well enough to avoid disrupting progress. Shares can advance on <10x P/E.
DEBENHAMS PLC (DEB LN) Improving momentum from strategic changes offer valuation upside | SEPURA PLC (SEPU LN) Strong H1 update
Debenhams Sepura
Share: