Financial Evaluation Of Debenhams Plc 5s5119

Financial Evaluation of Debenhams plc

For Assignment or Dissertation Help, Please : Muhammad Sajid Saeed +44 141 4045137 Email: [email protected] Skype ID: tosajidsaeed

Evaluation of Debenhams plc

Word count: 2988

TABLE OF CONTENTS

Company Background.................................................................................3 Task 1: Grundy 11 Step Process..................................................................3 Overview of 5 year record........................................................................3 Quick review of current and last year’s profit..........................................5 Quick review of director’s review highlights.............................................6 Income statement Analysis......................................................................6 balance sheet Analysis.............................................................................7 Ratio analysis...........................................................................................8 Cash flow and statement.........................................................................9 Interrelating Business Drivers..................................................................9 Future Outlook........................................................................................10 Summary & Conclusion..........................................................................10 Task 2: Evaluating the benefits of module BU7753...................................11 Accuracy.................................................................................................11 ability.........................................................................................11 Financing decisions................................................................................11 Financial health......................................................................................12 Other benefits........................................................................................12 References.................................................................................................13 Bibliography..............................................................................................13

COMPANY BACKGROUND Debenhams is a multinational retailer headquartered in the UK and sell designer clothes to men, women and children. Besides, the store also deals in furniture, sports, electrical, gifts, and toys. Currently, Debenhams trades across 28 countries through 240 stores. 64 stores are outside the UK and Ireland. Debenhams engage more than 100 successful designers. Recently it received an award of multi-channel retailer of the year. The company s many ‘not for profit’ organisations in the UK. Besides, the company has sound ethical corporate social responsibility (Debenhams 2014).

TASK 1: GRUNDY 11 STEP PROCESS Professor Grundy with colleagues proposed 11 step procedure to analyse the financial information of an organisation. These are the fundamental steps that can be used to evaluate any company including its business strategy, financial health, financial position, cash flows, revenues, business drivers & future prospects (Grundy et al. 1998). This assignment is based on exploring the financial information and strategy of Debenhams plc using Grundy’s model. OVERVIEW OF 5 YEAR RECORD The overview of 5 year record of Debenhams is presented in this section. As shown in figure 1 that the revenue in last five years raised enormously and this is a great achievement of Debenhams particularly during the effects of financial crisis. Exploring the financial statements and s of last five years, it is found that the store has adopted sound policies and advertising techniques to boost up its revenue. Besides, the international expansion of stores and renovation of UK and Ireland based outlets contributed to the revenue at vast level (Annual report and s 2013). 2,400.0 2,300.0 2,200.0 2,100.0 Revenue

2,000.0 1,900.0 1,800.0 1,700.0 2009

2010

2011

2012

FIGURE 1: REVENUE FOR 5 YEARS

2013

Figure 2 illustrates the gross profit, operating profit and net profit of Debenhams for the last five years. It is clearly illustrated in the line chart that gross profit and net profit increased with the age of time. However, the operating profit line indicates a fall of operating profit in after 2011. This is mainly due to a considerable rise in distribution costs as indicated in figure 3. 350.0

120.0

300.0

100.0

250.0

80.0

200.0

60.0

150.0

40.0

100.0

20.0 2009 2010 2011 2012 2013

50.0 2009

2010

2011

2012

Dis tribution cos ts

2013

FIGURE 2: GROSS PROFIT, OPERATING PROFIT & NET PROFIT

FIGURE 3: DISTRIBUTION COSTS

Some ups and downs are evident in figure 4 in total assets of Debenhams over the period of last five years. The total assets went down from 2009 to 2011 probably due to the impact of recession and then company managed to recover them in 2012 and then in 2013 as well. 2,150.0

2,100.0

Total as s ets

2,050.0

2,000.0

1,950.0 2009

2010

2011

2012

2013

FIGURE 4: TOTAL ASSETS

No major change is evident in current assets and current liabilities s (see figure 5) apart from a single noteworthy rise in 2010 when current liabilities increased significantly due to the term loan facility of £545.7 million (Annual report and s 2013).

1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 2009

2010

2011

2012

2013

FIGURE 5: CURRENT ASSETS & LIABILITIES

Figure 6 indicates changes in net assets and retained earnings. It is clearly shown in the diagram that net assets and retained earnings of Debenhams continuously expanded throughout the period of 5 years. The retained earnings were continuous negative till 2012 but the store managed to achieve positive figure in 2013 due to a successful buyback program which was initiated in April 2012. This program led Debenhams to purchase 47,441,877 ordinary shares for £45.2 million total cost from which 23,882,722 ordinary shares were purchased during the financial year of 2013 (Annual report and s 2013). 1,000.0 800.0 600.0 400.0 200.0 0.0 2009 -200.0

2010

2011

2012

2013

-400.0 -600.0 -800.0

FIGURE 6: NET ASSETS & RETAINED EARNINGS

QUICK REVIEW OF CURRENT AND LAST YEAR’S PROFIT This section provides a quick overview of Debenhams’s profits for 2012 and 2013 financial years. There is no large movement detected in the specific items in the income statement and balance sheet of Debenhams in two recent years. The only change is evident in fixed assets which was dropped off by £497.2 million in 2013 due to reduction in investments in several subsidiary organisations (Annual report and s 2013). This has resulted in £497.2 million reduction in fixed asset . An immense change is also evident in figure 8 with retained earnings increase £74.8 million. The reasons of increase in retained earnings are explained in the previous section.

80.0

3,000.0 2,800.0 2,600.0 2,400.0 2,200.0 2,000.0 2012

60.0 40.0 20.0 2013 Revenue

Fixed assets

Total assets FIGURE 7: REVENUES, FIXED & TOTAL ASSETS

0.0 2012 -20.0

2013 Retained earnings

FIGURE 8: RETAINED EARNINGS

Moreover during the financial year of 2013, new Debenhams stores are opened in Libya, Estonia, and Malaysia and the division in Romania was closed due to massive continuous fall in expected sales and revenue over the years (Annual report and s 2013). QUICK REVIEW OF DIRECTOR’S REVIEW HIGHLIGHTS The quick overview of director’s review is presented in this section. The ‘events since the year end’ section in the director’s report indicates two prominent things: newly opened stores in Libya, Estonia and Malaysia; and purchase of £14.3 million worth shares. Another important section in the report is ‘profit and dividends’. This section highlights an increment of the profit after tax £127.9 million in 2013 which was £125.3 million in 2012. This section also indicates the 3.4p price per share at the end of the year. ‘Share buyback programme’ section highlights the importance of this program which has resulted to increase the retained earnings with the purchase of 47,441,877 ordinary shares of 0.01p at a total cost of £45.2 million (Annual report and s 2013). The report mentions 30,000 employees in Ireland, UK, Denmark & Hong Kong. Apart from that the report mentions no essential contract in 2013; conceal of information from independent auditors; and no going concern which obstructs the operations of store in future. INCOME STATEMENT ANALYSIS The horizontal and vertical analyses are applied on income statement of Debenhams for comparing 2012 and 2013 financial years. The horizontal analysis is based on a line item comparison of two or more ing periods whereas vertical analysis reveals the correlations among components of one financial statement measured in percentages (Halpin and Senior 2011). Table 1 contains the horizontal and vertical analyses of income statement. In the horizontal analysis, each income statement item is compared with the revenue. This is done by taking the difference of current and previous year and dividing this difference by the previous year figure. The

horizontal changes in 2013 are more clearly evident in figure 9 which illustrates some noteworthy differences. For example, a 20% increase in distribution costs affected the operating profit and it was decreased by -4%. A 25% increase in finance income is prominent but its effect is reduced on ‘profit before taxation’ because of reduction of 13% in finance cost. Finally, the income statement horizontal analysis reveals 2% increase in the net income of 2013. On the other hand, the vertical analysis shows similarities between the income statement components of 2012 and 2013. The vertical analysis is conducted by dividing each item with revenue and multiplies by 100 for taking percentage. Therefore, no major difference is identified during vertical analysis in table 1.

TABLE 1: HORIZONTAL & VERTICAL ANALYSES OF INCOME STATEMENT

Revenue Cost of sales Gross profit Distribution costs istrative expenses Operating profit Finance income Finance costs Profit before taxation Taxation Net income

2013 £000

2012 £000

2,282.2 1,972.1 310.1 -97.4 -44.7 168.0 1.5 -15.5 154.0 -26.1 127.9

2,229.8 1,927.5 302.3 -81.0 -46.3 175.0 1.2 -17.9 158.3 -33.0 125.3

Horizont al % change 2% 2% 3% 20% -3% -4% 25% -13% -3% -21% 2%

Vertical 2013 2012 100% 100% -86% 14% -4% -2% 7% 0% -1% 7% -1% 6%

-86% 14% -4% -2% 8% 0% -1% 7% -1% 6%

Horizontal analysis (% change) 25% 20%

2%

2%

3%

2% -3%

-3%

-4% -13%

-21%

FIGURE 9: TREND LINE GRAPH OF HORIZONTAL ANALYSIS (INCOME STATEMENT)

BALANCE SHEET ANALYSIS Similar to income statement, table 2 demonstrates the horizontal and vertical analyses applied on balance sheets of 2012 and 2013. While horizontal analysis, each balance sheet item is compared with the total assets. Table 2 and demonstrates only one huge change in retained earnings when retained earnings increased by £74.8 million due to buyback program through which ordinary shares for £45.2 million were purchased in 2013 (Annual report and s 2013). The vertical analysis reveals absolutely no difference apart from slight differences in non-current liabilities and net assets or total equity. TABLE 2: HORIZONTAL & VERTICAL ANALYSES OF BALANCE SHEET

2013 £000

2012 £000

Horizont al % change

Vertical 2013 2012

Non-current assets

1,662.3

1,631.7

2%

78%

78%

Current assets

470.5

459.5

2%

22%

22%

Total Assets

2,132.8 741.9 271.4 646.5

2,091.2 727.0 267.5 703.2

2%

100%

100%

2%

-35%

-35%

1%

-13%

-13%

-8%

-30%

-34%

Current liabilities Net current liabilities Non-current liabilities

Net assets

744.4

13%

35%

32%

64.9

661.0 9.9

Retained earnings

-556%

3%

0%

Total equity

744.4

661.0

13%

35%

32%

Horizontal analysis (% change) 556%

13% 2% 2% 2% 2% 1% -8% Non-current assets Total Assets Net current liabilities Net assets

13% Total equity

FIGURE 10: TREND LINE GRAPH OF HORIZONTAL ANALYSIS (BALANCE SHEET)

RATIO ANALYSIS The ratio analysis conducted on the basis of the requirements in the assignment brief. The gearing ratio represents debt-to-equity ratio which indicates the dependence on borrowed funds (Tracy 2012). The results 2.16 and 1.87 in 2012 and 2013 are quite high value (see table 3). This shows more reliance of Debenhams on borrowed funds. The EPS is calculated in table 3 which demonstrates the Earnings per Share of Debenhams. The store’s EPS is better in 2013 compared to 2012. payable and receivable days represent the how often Debenhams pay their debt and receive outstanding amounts. The payable days are quite high as compared to the standard (60 to 80 days) mentioned by some experts (Kasunic and Kasunic 2009). On the other hand, Debenhams performs well in receiving outstanding amounts merely in 12 and 13 days. The inventory days (63 and 66) also look appropriate. This shows the average number of days when products remain in stock before being sold (Kasunic and Kasunic 2009). TABLE 3: RATIO ANLAYSIS

Ratio/da

Formula

2013 Calculati

Ans.

2012 Calculatio

Ans

ys

on

Gearing ratio

= Total liabilities Shareholders’ equity

EPS

=

payable days

=

receivab le days

=

Inventor y days

=

Net income Shares outstanding/100 Trade and other payables Cost of sales/ 365 Trade and other receivables

=

=

=

=

Revenue / 365 Inventory Cost of sales/ 365

=

1,388.40 744.4 127.9 1,254.5/1 00 545.8 1,972.1/3 65 78.3 2,282.2/3 65 357.9 1,972.1/3 65

=

1.87

= 10.2 p =

101 day s

=

13 day s

=

66 day s

n 1,430. 20 661.0 12 5.3 1,281.3/1 00 52 5.4 1,927.5/3 65 7 5.4 2,229.8/3 65 33 2.2 1,927.5/3 65

. = 2.1 6 =

9.8 p

99 = day s 12 = day s 63 = day s

CASH FLOW AND STATEMENT The consolidated cash flow statement of Debenhams demonstrates £24.1 million net cash and cash equivalents in 2013 and they were £34.6 million in 2012. This shows -£10.5 million (-30.4%) decrease. This decrease in cash is the result of cash flows from investing activities which shows that Debenhams used £133.3 million cash in 2013 and this figure was £118.6 million in 2012. Also the of cash flows from financing activities expanded from £70.8 million to £76.5 million. INTERRELATING BUSINESS DRIVERS The industry analysis reveals that each £1 spends on mobile but further £10 spend in-store. Debenhams assist their customers to use their mobile devices by giving them WIFI facility in stores. It is mentioned in the annual report and s (2013) that Debenhams’s ‘mobile’ customers are increasing and the company has achieved 40% growth due to online visits. This growth represents £241 million revenue in 2013 from which our £366 million (25%) came through smart-phones and tablets. This growth is the result of encouragement from Debenhams to their customers to use mobile applications which were ed more than 6 million times in last couple of years. Additionally some other factors also contributed to the growth of Debenhams in 2013. These factors include: renovation of UK and Ireland based stores to attract customers on high streets, international expansion, global flagship plan, and closure of the Romanian franchise stores (Annual report and s 2013).

FUTURE OUTLOOK Looking forward, several techniques Debenhams is anticipating to enhance mobile use for increasing sales and profit. One of these techniques is ‘Click & Collect’ which will allow customers to ‘check in’ when they visit store to receive their parcel so the store can have the parcel ready for them. Furthermore, plans for international expansion to emerging markets also can contribute significantly to the portfolio of Debenhams in years. The international sales in 2013 was 19% which is expected to grow in 2014 due to new openings in Libya, Estonia and Malaysia. Debenhams also planning to open 16 new stores in different locations in Asia and Middle Eastern countries. The board is also looking forward to enhance EPS in the near future (Annual report and s 2013). All these factors will significantly contribute the profit and revenue improvement. SUMMARY & CONCLUSION Grundy 11 stage process has been applied throughout this report to analyse Debenhams financial statements. It is identified that Debenhams overall performed well over the 5 years period and achieved considerable growth in revenue, gross profit and net profit. But on the other hand, the operating profit declined because of 25% rise in distribution costs in the last year. The net assets and retained earnings increased over the years, however, the fixed assets decreased by £497.2 million due to reduction in investments in several subsidiary organisations. Another major change is evident in the retained earnings which increased significantly in 2013. The ratio analysis reveals that gearing ratio is quite high which shows the dependence on borrowed funds. The EPS, receivable and inventory days seem appropriate but Debenhams take additional days to clear payables. A £10.5 million (-30.4%) decrease is found in the cash and cash equivalents in 2013 which is due to the £133.3 million cash use on investment activities. Debenhams achieved major growth in revenue due to increase in online sales and the company is expecting more growth in the near future.

TASK 2: EVALUATING THE BENEFITS OF MODULE BU7753 This module has been beneficial for me in various ways. For example, studying this module I become aware of how to analyse financial information that deals with balance sheets, income statements, cash flow statements, capital expenditures, and business trends etc. I believe that this information will be highly beneficial for me as a project manager in my company. ACCURACY In fact every company has ants and tax advisers; and thus my company also has particular ing and finance department where professionals ensure error-free reporting of tax and s to government. My job role is different and related to the project management. After studying this module, now I believe that it is important for me to have an idea about how to analyse company’s financial statements in order to that all information is correct to the best of my knowledge. This could be a plus point for me to manage the projects more effectively. For example, now I am sure that I will be able to control cash flow and capital expenditure at project level. In addition, I will be able to estimate costs more accurately to assist finance department to raise funds for the project. ABILITY The module will also help me in future to encourage ability on the part of ing and finance individuals by constantly analysing the financial statements. In fact, it is the job of internal and external auditors but analysing the statement at my end will give me confidence for managing project costs and finances more effectively. In addition, based on the nature of the job and contract with external financial advisors & companies to crunch company’s financing, evaluating financial information after this groundwork ing may also make sure ability (Cooper et al. 2012). FINANCING DECISIONS Financing decisions is the key advantage that I will get during my job in of financing of oil and gas projects. Financing is a long process in my company and it has lots of bureaucratic processes. In my department, hardly anybody is aware of the ing and financing insights, so it will be advantageous for me to have knowledge of finance and maybe I will be able to assist managers in their financing decisions. With the help of financial statement analysis that I have done during this assignment, I hope I will be able to analyse the financial health and

position of any organisation for which my organisation will be going to contract with. For example, before engaging a contractor or subcontract for the project, I might be able to analyse their financial statements through ratio analysis. More specifically, I will be able to observe the s payable and receivable days to discover whether they have better reputation in the market. In addition their long-term and short-term liabilities will give me the idea how much they rely on debt. FINANCIAL HEALTH Any company’s success primarily relies upon its financials (Besley and Brigham 2011). The skill of analysing the company’s financial statements will give me a better idea of the financial health of the company. For example, during my job role I will be able to calculate profitability, leverage, liquidity and outcomes of the project. OTHER BENEFITS Every project has two aspects: financial aspect and non-financial aspect and these aspects are attached with all the phases of the project (Besley and Brigham 2011). Moreover, each project requires credit or funding as a part of strategy to remain financially viable. Projects need financing and in nearly all the situations, the lender will require a balance sheet to see whether the loan can be approved for the project or not. Therefore, the understanding of balance sheet is essential for me as a project manager to highlight the important parts in it to show to the lender during application or face to face meeting in order to convince the lender for a loan. Additionally, the internal s payable report will help me to show to the lender about the responsibility of the company in paying bills on time. During my job role as a project manager in my company, I will be able to perform regular finance functions including financial planning, finance needs, recognising the finance sources, funds allocation, and controlling and monitoring of funds for the purpose to achieve profitability at project level as well as company level.

REFERENCES Annual report and s 2013. Debenhams plc Annual report and s 2012. Debenhams plc Annual report and s 2011. Debenhams plc Annual report and s 2010. Debenhams plc Annual report and s 2009. Debenhams plc Besley, S. and Brigham, E. 2011. Principles of Finance. (5th Edition), Cengage Learning Cooper, K., Funnell, W. and Lee, J. 2012. Public Sector ing and ability. UNSW Press Debenhams 2014. . Available from: http://www.debenhams.com/about-debenhams (Accessed: 10 March 2014) Grundy, T., Johnson, G and Scholes, K. 1998. Exploring strategic financial management. London, Prentice Hall Halpin, D. W. and Senior, B. A. 2011. Financial Management and ing Fundamentals for Construction. New Jersey, John Wiley & Sons Kasunic, T. K. and Kasunic, F. T. 2009. Supersize Your Small Business Profits!: How to Survive the Current Recession and Manage Your Small Business Profitably During Turbulent Economic Times. Trafford Publishing Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net

BIBLIOGRAPHY Bhattacharyya, A. K. 2006. Financial ing For Business Managers. (3rd Edition), PHI Learning Pvt. Ltd Choi, F. D. S. 2003. International Finance and ing Handbook. (3rd Edition), John Wiley & Sons Griffin, M. P. 2009. MBA Fundamentals ing and Finance. Kaplan Publishing Gupta, A. 2008. Financial ing for Management: An Analytical Perspective. Pearson Education India

Hoffman, W. M. 1996. The Ethics of ing and Finance: Trust, Responsibility, and Control. Greenwood Publishing Group Mittal, R. K. 2011. Management ing and Financial Management. FK Publications Pitts, C., Sharghi, G. K. and Gonzales, L. 1999. ing and Finance for Managers. (2nd Edition), University of Phoenix, School of Undergraduate Business and Management Ryan, B. 2004. Finance and ing for Business. Cengage Learning EMEA