Debenhams SWOT & PESTLE Analysis

Strength

1. Sound Financial Performance:There was an increase of 2.1% in international like for like (LFL) sales on a reported basis in the 52 weeks to 29 August. The sales of its beauty products surged by 5% & 8% for food services. The full price sales increased by 1.7%. International EBITDA surged by 8%. Magasin's (its primary profit earning international centre) sales stood strong despite a testing business environment. Net debt ameliorated. The final dividend was of 2.4p per share i.e. a total dividend of 3.425 p per share. Debenham's gross transaction value rose by 2.0% to £2,954.1 million for the 1 year period ending September 2017. Its revenue surged by 1.1% to £2,335.0 million. There was a dip in net finance costs by 1.6% to £12.3 million which is due to reduced average debt of £257 million in comparison to 2016's £273.

2. Strong digital growth: Digital growth grew steadily in Financial Year 2017. The sales through digital platforms grew by 12.7% with 13.4% growth in EBITDA .This growth was steered mainly by the increase in demand for mobile phones. 55% of the orders on digital platform were made through mobile phones and the conversion rate has grown by 15% primarily due to smartphones. Growth is also driven by concentrated & flexible web development programmes, constant improvements in beauty brand presentations & introduction of a web app. This has enabled better user interface & faster user responsiveness. 40% growth across digital platform has been through profits from Magasin (international centre). They have also created their brand presence on UK's Amazon Prime, Very, Label, etc. to enter into new geographies and across different demographics.Debenham's website clocked a phenomenal over 280 million visits in 2017 with the brand having 97% awareness in the UK.

3. Steady Strategic progression: A new programme, Debenhams Redesigned was put forth in FY 2017 which will help Debenhams to expand in social shopping space. Several structural & operational modifications and significant partnerships have been made in 2017. They have decreased stock density which has significantly ameliorated full price sell-through to 1.7%. Debenhams concentrated on categories associated with holiday during 2016 summers & marketed it well which made them the front runner in UK’s swimwear market. It also strengthened its market in accessories & cross- shopping in luggage in the holiday season. They have reintroduced "Beauty Club loyalty" which is endorsed by Alesha Dixon, a popular face which enhances brand representation. It will add to Debenham's existing base of 1.2 million cardholders by more than 10%.

4. Developing channels through Partnership: Partnerships with Mobify and Sapient Razorfish enhanced the pace and interface of Debenham's mobile portal. Within a span of just 3 weeks of web app's introduction, conversion rates improved by double digit percentage points. They have partnered with LTD which is UK’s top digital beauty services provider. This will aid in increasing footfall in their stores. Its partners in Middle East, Eastern Europe and South East Asia have supported shipments to over 60 countries and have created an emerging brand whole selling business. It has opened 15 coffee shops with Costa Coffee & a range of food options with Patisserie Valerie and Franco Manca. It will grow its market cap and further increase sales especially in Ireland and Denmark.

Weakness

1. Dip in in-store sales: The in store spending has significantly decreased. The sales growth was solely attributed to the online demand in 2016. There was a dip in the retail clothing sales as well. The clothing range has especially seen a dip in the first half of 2016 followed by slow growth. Profit Margins have dipped due to an adverse business environment. This has poorly affected the overall revenue which fell to 1892.9 million i.e. a decrease of 0.7%.

2. Weak UK market adversely affecting Earnings: Debenhams has 59 stores in UK. The sales growth failed to pick up even in peak Christmas season. UK's Like-for-like sales dipped by 2.6% in the 17 weeks till 30 December 2017. The UK's clothing market has become volatile. There is also increased competition which has led to a dip in clothing sales. This has forced Debenhams to slash prices in the UK. Decreasing mark-up will lead to smaller profit margins. This has already affected its share price in 2018 when the price fell by around 20% in the first week of January 2018. It will lead to a poor perception in UK market & may further deteriorate sales.

Opportunity

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Threat

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Political

1. Adverse impact on sales due to Brexit: Brexit has negativity affected Debenhams sales as it has had substantial impact on the business conditions. This is primarily due to the dip in discrepancy purchases. The customers in UK region have reacted to the volatile business conditions by reducing their spending post UK's vote to exit from the European Union. Brexit has also weakened the sterling which affected the revenue for 2016 & 2017. The trade agreements, foreign access to different markets, freedom of goods and services flow, people and capital movements will be negatively affected due to competition from EU.

2. Positive impact of decrease in corporation tax: The effect of the decrease in corporation tax rate which was enacted in 2015 Act was reflected by the decrease in deferred tax liability by around £2.3 million in 2016. As a result of the Finance (No. 2) “the 2015 Act”, that was enacted on 18 November 2015 led to decrease of the main rate of corporation tax to 19.0% from 1 April 2017 and to 18.0% from 1 April 2020. The overall impact of these tax rate changes reduced the deferred tax liability to £0.9 million and the deferred taxation expense plunged in 2016 by £0.9 million. 2016's corporation tax liability fell by £0.3 million and for 2017 current taxation expense fell by £0.3 million. These reductions create more room for profit margins.

Economic

1. Hedging against Currency Fluctuations: 35% of the sourcing costs of material bought by Debenhams are in US dollar or linked to dollar. Thus, to avoid negative impact of decrease in the value of sterling in the spring & summer of 2018, Debenhams has adopted hedging strategy. They hedged for 12-18 months in 2016 to fully hedge for Financial Year 2017. They partially hedged for FY 2018 to avoid adverse impact on spring and summer sales of 2018. This would help in mitigating the additional costs associated with currency fluctuations. It also shields against cash & liquidity constraints that may adversely affect operations & financial health of the group.

2. Prudent strategizing for inflationary situations: Fluctuation in inflation has significant impact on liability calculations, material costs, sourcing decisions & pricing decisions. The net profitability sales & social pension schemes for employees are affected by inflation. Brexit has increased sensitivity to inflation though the difference between wage growth and inflation rate has started dipping. Thus the group has developed policies which prioritise cost control. They review operational effectiveness of their processes and systems which aid in building a strong supplier base and maintaining product quality. It mitigates against cost price inflationary situations and gives leverage in supply change. Its sourcing decisions are reviewed by keeping the assumptions of inflation in perspective which help in development of more international channels as further product consolidations are done.

Social

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Technological

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Legal

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Environmental

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