Finance Director's review

Group

Gross transaction value for the Group for the 53 weeks to 3 September 2011 of £2,679.3 million increased by 4.5% over the previous year. For the 52 weeks to 27 August 2011, Group gross transaction value grew by 2.9%. The primary drivers of gross transaction growth were the multi-channel business, Magasin du Nord, international sales and new UK space.

Revenue for the 53 week period was £2,209.8 million, 4.2% higher than last year. On a 52 week basis, revenue increased by 2.7%.

Like-for-like sales including VAT increased by 1.2% over the 52 week period. Excluding VAT, like-for-like sales for this period were slightly lower, down 0.3%. This was a good result given the difficult economic environment and the disruption to sales arising out of the adverse winter weather across the UK in November and December which alone adversely impacted like-for-like sales for the year by some 1%.

Group gross margin fell slightly by 20 basis points during the year. This was partly a result of a decision to maximise cash profit by driving sales during the second half of the year and partly some oneoff benefits in last year’s figure as result of the acquisition of the Faith footwear brand.

Gross profit before exceptional items for the year increased from £290.4 million to £296.7 million, an increase of 2.2% for the year.

Headline profit before tax for the year, which adds back amortisation of capitalised bank fees and exceptionals, for the 53 week year increased by 10.0% year-on-year from £151.0 million to £166.1 million. Reported profit before tax and exceptionals rose by 10.3% to £160.3 million from £145.3 million for the same period last year.

Basic earnings per share for 2011 were 9.1 pence (2010: 7.5 pence) and diluted earnings per share were also 9.1 pence (2010: 7.5 pence).

Magasin du Nord

Magasin du Nord contributed gross transaction value of £246.7 million to the 53 week year. Last year Magasin contributed £191.1 million for the 42 weeks from acquisition on 7 November 2009. Like‑for-like sales at Magasin for the period since acquisition grew by 6.3% in Danish kroner and by 4.8% in sterling.

The work which has been done over the past two years to increase Magasin’s gross margin by introducing Debenhams’ own brand product ranges and leveraging the Debenhams’ supply chain has driven growth of 200 basis points in the year. Magasin’s gross margin for the year was 34.7% compared with 32.2% at the time of acquisition.

Magasin delivered operating profit before exceptionals of £8.5 million for the year against £1.5 million for the 42 weeks of the prior year.

Online

The multi-channel business delivered another strong year of sales growth. Online gross transaction value increased by 73.8% to £180.4 million from £103.8 million. As such, the online contribution to gross transaction value (excluding Magasin) increased to 7.4% from 4.4% last year.

International franchise stores

Sales from the international franchise stores increased by 16.5% to £77.0 million from £66.1 million a year ago. The contribution to gross transaction value (excluding Magasin) increased from 2.8% to 3.2%.

The store portfolio stood at 169 stores at the end of the year. This comprised 141 full department stores and 22 small department stores (25,000 sq ft or less) in the UK and Republic of Ireland and six full department stores in Denmark. Total trading space at year end stood at 12,443,000 sq ft, an increase of 1.6% over last year. Average new space across the year was 2.6% excluding Magasin and 3.9% including Magasin. Three new stores opening during the course of the year. These were Bath (83,000 sq ft, opened September 2010), Wakefield (70,000 sq ft, opened May 2011) and Fareham (24,000 sq ft, opened June 2011). All three performed in line with our expectations.

Eleven store modernisations were undertaken during the year. Five were completed in the first half of the year in time for peak trading: Leeds City Centre, Merryhill, Milton Keynes, Portsmouth and Romford. A further six commenced in the second half for completion early in the 2012 financial year: Coventry, Gloucester, Nottingham, Southampton, Stirling and Trafford Park. The average investment in these refits was £23 per sq ft. For the modernisations finished at the end of 2010 and during the first half of 2011, the average sales increase compared to the pre-refit period was 5.8%.

Cost discipline continues to be a major focus for the business. The main cost categories are store payroll, store rent and warehousing and distribution costs.

• Store payroll as a ratio to gross transaction value improved to 10.9% (2010: 11.1%) as a result of efficiency savings.
• Store rent costs of £187.7 million in 2011 compared to £172.2 million in the prior year, the increase a result of accounting changes following the cancellation of long leases on nine stores and at the same time entering into new sale and operating lease contracts on those stores. The ratio to gross transaction value increased from 6.7% last year to 7.0%.
• Warehousing and distribution costs increased by 27.4% as a result of higher levels of activity in the online business and £10 million of dual running costs associated with the new Sherburn distribution centre.

Stock levels continued to be managed very tightly during the year in light of the difficult trading environment. Overall, stock increased by £26.0 million (8.8%), largely due to increased cross prices, expansion of the multi-channel business and new stores. Like-for-like stock unit density fell by 2.6%. Terminal stock at the end of the year stood at 2.6%, in line with Debenhams’ historical low.

The net interest charge of £23.4 million for the 53 weeks ended 3 September 2011 represented a significant reduction from the previous year (2010: £49.8 million). This reflects the lower interest rate associated with the refinancing of the senior credit facility, the reduction in the Group’s level of debt and the cancellation of finance leases.

The Group’s tax charge was £43.1 million on a profit of £160.3 million. This gives an effective tax rate of 26.9% compared with 30.7% last year. The reduction in effective tax rate is largely due to reductions in the headline rate of corporation tax (accounting for 1.3% of the 3.8% nominal decrease) and the net effect of operations overseas (a further 2.4%).

The board reinstated dividend payments during the year with an initial target dividend cover of three times earnings. An interim dividend of 1.0 pence per share (2010: nil) was paid to shareholders on 8 July 2010. The board has proposed a final dividend of 2.0 pence per share (2010: nil) which will be paid to shareholders on 13 January 2012, taking the total dividend for the year to 3.0 pence (2010: nil).

Capital expenditure increased during the year to £114.0 million from £98.8 million last year. The increase is mainly due to the investment in new warehousing and distribution facilities, notably a new distribution centre at Sherburn, Yorkshire. This investment will provide the capacity to meet the expected needs of the Group until at least 2018 and will enable the Peterborough distribution centre to be converted to an online fulfilment centre, reducing current distribution costs and increasing the profitability of the multi‑channel business.

Net cash generated from operating activities in the 53 weeks to 3 September 2011 was £199.4 million. This was a decrease of £7.8 million on the previous year (2010: £207.2 million).

The Group’s net debt position as at 3 September 2011 was £383.7 million (28 August 2010: £516.8 million), a reduction of £133.1 million during the course of the year.

On 18 July 2011 it was announced that a refinancing of the £650 million senior credit facility had been completed. The refinancing extends the maturity date for the borrowing facility to October 2015 from October 2013, with a further option to extend to October 2016. In addition to the extension in tenor, the amended terms reduced the Group’s cash interest rate by 0.5% to around 4% with immediate effect. Associated refinancing costs of £3.3 million will be amortised over the life of the facility. The £650 million facility continues to comprise a £250 million term loan and a £400 million revolving credit facility.

During the year, the Group cancelled long leases on nine stores and at the same time entered into new sale and operating lease contracts on those stores. The combination of the cancellation of the existing finance leases and the new sale and operating lease transactions generated a net cash inflow of £36.6 million and reduced net debt by £79.2 million.

The board has established an overall treasury policy and has approved authority levels within which the treasury function must operate. Treasury policy is to manage risks within the agreed framework whilst not taking speculative positions.

The policies and strategies for managing financial risks are described in Note 22 of the Group financial statements starting here.

The Group provides a number of pension arrangements for its employees. These include the Debenhams Retirement Scheme and the Debenhams Executive Pension Plan (together the “pension schemes”) which closed for future service accrual from 31 October 2006. The pension schemes’ surplus as at 3 September 2011 was £3.9 million (28 August 2010: £80.7 million deficit). Further information can be found in Note 24 to the Group financial statements starting here.

Future pension arrangements will be provided for Debenhams’ employees by stakeholder or defined contribution pension schemes.