Debenhams Regulatory News (DEB)

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Competition for Customers

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Business Strategy and Transformation

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Supply Chain and Key Suppliers

Risk

· Inability to predict accurately or fulfil customer preferences or demand through competitive, economic and profitable channels

· This is an increasing risk given the ongoing market conditions faced

Risk

· Failure to deliver Debenhams' redesigned strategic priorities

· This is an increasing risk due to the importance of fully delivering the strategy

Risk

· Adverse events influencing either the sustainability of the supply chain or Debenhams' relationship with any of its major suppliers, service providers, international partners, designers, or concessionaires

· This is an increasing risk due to the potential of reduced access to credit insurance for our supply base

Potential Impact

· Sales will be lower, market share will be reduced and the Group may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory or may experience inventory shortfalls on popular merchandise

· Channel shifts away from stores to online could lead to higher operational costs within the online channel and lower profitability, or even impairment, of store assets

Potential Impact

· Could significantly delay or prevent the achievement of Debenhams' business plan and could have a material adverse effect on Debenhams' business, financial condition or results of operations

Potential Impact

· Place pressure on margins and profitability or require the Group to divert financial and management resources from more beneficial uses

· Additional unplanned costs required to transfer operations between providers or additional operational costs from a new provider

· Changes in exclusivity arrangements with designers or any decline in their popularity

· The loss of a number of key concession partners

Examples of Mitigation

· Making shopping onfidence-boosting, sociable and fun is at the heart of Debenhams' strategy, which is outlined on pages 10 to 19

· In developing its strategy, the Group takes into consideration market, trend and customer research, with the customer insight team providing valuable intelligence on any changes in customer priorities

· An understanding of customers and their needs is developed by listening to their views, market intelligence and reviewing KPIs which ensures that pricing is competitive and promotional activity is appropriate

· The UK exiting the European Union may generate foreign exchange rate volatility, lead to delays at ports, or changes to trade agreements and duty rates, which could impede the organisation's ability to compete effectively, meaning this is a risk that is carefully monitored

Examples of Mitigation

· Debenhams is reviewing and updating its business change roadmap to ensure its project portfolio focuses on the five key strategic areas outlined on pages 10 to 19

· Management supplies detailed updates on progress within the transformation programme, which are closely reviewed by the board to ensure that management is focused on key priorities, cost control and benefit realisation

· The UK exiting the European Union may lead to loss of access to the free movement of goods, services, people and capital, making this a risk that is closely monitored

· The volume and complexity of change being implemented, its importance to the business plan, and our reliance on third party specialist resource to support delivery make this a risk that is monitored carefully

Examples of Mitigation

· Debenhams fosters close and collaborative relationships with its suppliers. Both parties work towards the objective of optimising sustainable fulfilment and costs, which is measured regularly by management through KPIs. You can read more about how the Group builds relationships with our suppliers on page 22

· Debenhams continues to develop its supplier base to mitigate the potential of cost-price inflation without compromising the quality of its products. In addition, the sourcing division has been strengthened to include additional expertise which assists with sourcing decisions, production consolidation and lead time reduction, amongst other things

· Loss of supplier confidence impacts on quality or availability of key product

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Economic Environment

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Financial, Liquidity and Credit

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Systems Availability and Cyber Security

Risk

· Continuing adverse economic conditions

Risk

· Exposure to market rates, liquidity and credit risks have an adverse impact of the Group's financial position or performance

· This is an increasing risk due to the recent fall in profitability and the reduction in credit insurance available for Debenhams' suppliers

Risk

· Systems failure, external attack of systems, or data inaccuracy

· Inability to continue smooth operations following a major incident

Potential Impact

· A decline in sales on discretionary purchases leading to a reduction in profit alongside a material adverse effect on Debenhams' results

Potential Impact

· A material reduction in cash and liquidity could affect the financial position and/or performance of the Group

· Hinder ability to adjust rapidly to changing market conditions and impact earnings and cash flow

Potential Impact

· Failure in the stability, integrity or availability of information systems could adversely affect Debenhams' business operations and results or could cause inappropriate decisions to be made using wrong, missing or ambiguous information

· Cyber attack resulting in reduced availability of Debenhams' systems, loss of reputation and customer trust, and regulatory fines

Examples of Mitigation

· The board conducts strategic business reviews which ensure that management is focused on key priorities and cost control. These reviews also focus on the Group's strategy to make shopping confidence-boosting, sociable and fun

· The continued volatility of the consumer environment make this a risk that is monitored carefully

Examples of Mitigation

· Committed funding lines are regularly reviewed for headroom and refinanced significantly in advance of expiry. Current facilities expire in June 2020 and July 2021

· Regular cash and liquidity forecasting supports proactive management of cash flows to meet the Group's obligations as they fall due

· Hedging policies are in place to manage interest and exchange rate risk to minimise the impact of any material market movements

· Further details on financial risks are included in the notes to the financial statements

Examples of Mitigation

· A robust systems infrastructure is required to support the delivery of our strategic objectives which are outlined on page 7

· Information systems developments are key enablers and critical to ensure we can compete effectively, and these are monitored through a business change roadmap

· The overall governance framework has been further enhanced, and includes committees that focus on areas such as general data protection regulation and payment card industry compliance

· A business continuity policy and processes, ensure an effective framework is in place to enable the swift recovery and continuation of normal business operations, and this has been improved through the introduction of a new data centre

· This continues to be an area of high management focus given the rising levels of cybercrime globally and the increasing reliance on information assets

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Property

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Legal and Regulatory

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Key Personnel

Risk

· An adverse impact on performance from property-related events, such as store closures, business rates or rental increases

· This is an increasing risk due the potential for additional store closures, and associated costs of exit, following the comprehensive review of the UK portfolio

Risk

· Events that negatively impact the reputation of, or value associated with, Debenhams' brand

Risk

· Loss of key management or other personnel Debenhams depends upon

· This is an increasing risk given the ongoing market conditions faced

Potential Impact

· Significant alterations in rental terms could have a material adverse effect on the business

· Disputes over store modernisations may lead to reinstatement costs and termination of leases may lead to unexpected dilapidation costs being incurred

Potential Impact

· Loss of stakeholder trust and confidence, including an adverse effect on Debenhams' ability to attract and retain third party brands, suppliers, designers, concessions and franchisees

· Material adverse effect on Debenhams' business, financial condition or profitability

Potential Impact

· Significantly delay or prevent the achievement of Debenhams' business plan

· Material adverse effect on Debenhams' business, financial condition or results of operations

Examples of Mitigation

· Debenhams has a specialist property team which manages all aspects of leasehold property, including cost renegotiations, communication of the store modernisation programme, lease renewals and adherence to all legal obligations under the lease

Examples of Mitigation

· Forums exist to focus on specific areas of legislation, with business policies and procedures in place to ensure roles and responsibilities are understood across the Group

· Debenhams has specialist teams in place to monitor changes to legislation and standards, further supported by membership of key industry bodies to enhance awareness

· All suppliers are expected to adhere to Debenhams' own supplier code of conduct, which is underpinned by Debenhams' robust policy on compliance that includes a focus on social and ethical standards

· The uncertainty around the likely changes to UK legislation following the UK decision to exit the European Union mean this is a risk which is being monitored closely

Examples of Mitigation

· In order to attract and retain talent, both succession and personal development plans are in place throughout the Group. In addition, target-led, performance-related incentive schemes exist

· The UK decision to exit the European Union could impact on the availability of talent in the job market and the eligibility for individuals to work in certain jurisdictions, making this a risk that is monitored carefully