Financial Evaluation of

Debenhams plc

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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 years profit..........................................5
Quick review of directors 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
Accountability.........................................................................................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 supports 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 Grundys 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 accounts
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 accounts
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 passage 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

accounts (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 accounts 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 accounts 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 YEARS PROFIT

This section provides a quick overview of Debenhamss 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 account
which was dropped off by 497.2 million in 2013 due to reduction in
investments in several subsidiary organisations (Annual report and
accounts 2013). This has resulted in 497.2 million reduction in fixed
asset account. 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 accounts 2013).
QUICK REVIEW OF DIRECTORS REVIEW HIGHLIGHTS
The quick overview of directors review is presented in this section. The
events since the year end section in the directors 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 accounts 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 accounting
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
Administrative 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 account increased by 74.8 million due
to buyback program through which ordinary shares for 45.2 million were
purchased in 2013 (Annual report and accounts 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 stores EPS is better in 2013 compared to 2012.
Account 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

Account
payable
days

Account
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 account 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 accounts (2013) that Debenhamss 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 downloaded 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 accounts 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 upcoming 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 accounts
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 account increased over the
years, however, the fixed assets account 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, account
receivable and inventory days seem appropriate but Debenhams take
additional days to clear account 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 accountants and tax advisers; and thus my
company also has particular accounting and finance department where
professionals ensure error-free reporting of tax and accounts 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 companys financial
statements in order to verify 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.
ACCOUNTABILITY
The module will also help me in future to encourage accountability on the
part of accounting 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 companys financing, evaluating financial
information after this groundwork accounting may also make sure
accountability (Cooper et al. 2012).
FINANCING DECISIONS
Financing decisions is the key advantage that I will get during my job in
terms 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 accounting 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
accounts 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 companys success primarily relies upon its financials (Besley and
Brigham 2011). The skill of analysing the companys 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 accounts 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 accounts 2013. Debenhams plc
Annual report and accounts 2012. Debenhams plc
Annual report and accounts 2011. Debenhams plc
Annual report and accounts 2010. Debenhams plc
Annual report and accounts 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 Accounting and
Accountability. UNSW Press
Debenhams
2014.
About
us.
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
Accounting 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 Accounting For Business Managers.
(3rd Edition), PHI Learning Pvt. Ltd
Choi, F. D. S. 2003. International Finance and Accounting Handbook. (3rd
Edition), John Wiley & Sons
Griffin, M. P. 2009. MBA Fundamentals Accounting and Finance. Kaplan
Publishing
Gupta, A. 2008. Financial Accounting for Management: An Analytical
Perspective. Pearson Education India

Hoffman, W. M. 1996. The Ethics of Accounting and Finance: Trust,

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