Debenhams Regulatory News (DEB)

Continuing adverse economic conditions may have a material adverse effect on Debenhams' results

A decline in sales on discretionary purchases leading to a reduction in profit.

This is a decreasing risk because the gap between inflation and wage growth has started to narrow. However the consumer environment remains volatile and we remain cautious about the outlook.

The board conducts strategic business reviews which ensure that management is focused on key priorities and cost control. These reviews also focus on the four pillars of the Group's strategy to build a leading international, multi-channel brand and the operational effectiveness of the processes and systems which link the pillars of the strategy together.

Debenhams' business could suffer as a result of weak sales during peak selling seasons or extreme or unseasonal weather conditions

Adverse effect on inventory and profit.

Debenhams' product and brand strategy involves selling a diverse mix of products in order to reduce reliance on those that may be weather dependent. To help mitigate the impact of this risk, should it occur, management would review the benefits of strengthening both planned and tactical promotional or marketing activity in order to drive sales.

Failure in the stability, integrity or availability of information systems could adversely affect Debenhams business operations and results

Risks associated with systems failure, external attack of systems, or data inaccuracy may also significantly damage ability to manage information technology systems, such as our website or warehouse management systems, or could cause inappropriate decisions to be made using wrong, missing or ambiguous information.

A robust systems infrastructure is required to support the delivery of our strategic objectives which are outlined on pages 8 and 9. As such, information systems developments are key enablers and critical for accelerating the pace of change necessary to compete effectively. To support the efficient and effective delivery of strategic and business critical projects, a business change roadmap has been developed, the governance framework has been enhanced and a series of projects are under way to strengthen business continuity to maintain and protect performance.

Monitoring processes are in place across a number of key business systems, alongside specialist teams, and a disaster recovery site is in place where associated systems are tested to ensure that the requirements for invocation are fully understood.

Inability to effectively invoke a business continuity plan could adversely affect Debenhams' business operations, reputation and results

Unable to continue operations smoothly in the event of a major incident which may have an adverse effect on inventory and profitability and divert financial and management resources from more beneficial uses.

The business continuity management committee is comprised of senior executives and works to a framework based on the most recent international standard. The key objectives of this committee are to ensure that potential threats to the organisation and the impacts that those threats might cause have been identified, that a framework to build organisational resilience to known threats is in place and that the framework has the capability to deliver an effective response to safeguard the Group.

A business continuity policy, describing roles and responsibilities across the Group, ensures that an effective framework is in place to enable the recovery and continuation of normal business operations as soon as possible in the event of any disruptive incidents. Key business systems are managed and monitored by specialist teams.

Theft of customer data or breach of payment card industry standards could adversely affect Debenhams' business operations, reputation and results

Negative effect on reputation leading to loss of stakeholder trust and confidence, with subsequent impact on profitability as well as diverting financial and management resources from more beneficial uses.

This is a decreasing risk because of the ongoing work and progress made around payment card industry ("PCI") compliance.

Steering groups exist for both data protection and PCI standards which review and report on compliance levels. Debenhams utilises external specialists as required to assist in achieving its compliance goals, with compliance levels versus the PCI standard monitored by management and reported to the Audit Committee. A number of security tools are employed to protect data, including encryption, intruder detection and data loss prevention.

Debenhams business could suffer as a result of failing to compete effectively

Place pressure on our pricing strategy, margins and profitability.

Divert financial and management resources from more beneficial uses.

Debenhams' product and brand strategy gives customers a unique, differentiated and exclusive choice of brands, products and categories within a good/better/best pricing architecture. 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. Debenhams' customer insight team provides valuable intelligence to keep us alert to changes in customer priorities

Debenhams' business may suffer if it is unable to predict accurately or fulfil customer preferences or demand through competitive, economic and profitable channels

Sales will be lower, market share will be reduced and the Company 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.

Any of the above could have a material adverse effect on Debenhams' business, financial condition or profitability.

Delivering a compelling customer proposition is at the heart of Debenhams' strategy. In developing product and brand strategy, the Group takes into consideration market, trend and customer research to help it predict likely demand for its products and services. Debenhams continues to invest in its product and brand strategy to ensure that it remains competitive.

A number of specific actions are being taken to address the issues of the channel shift. These include:

· Building a more competitive and economic multi-channel business to drive sales, increase the recovery of fulfilment costs and reduce the cost per unit of fulfilment. To this end, a range of competitive delivery options and a single stockfile are being introduced.

· Driving a better return on UK store assets through the introduction of additional products, brands and services as well as ensuring that stores are fully configured for multi-channel shopping.

A failure to deliver Debenhams' key strategic priorities may adversely affect its business

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.

This is an increasing risk due to the volume of change being implemented and its importance to the business plan. 

Debenhams has developed a business change roadmap, which includes a number of projects that support the delivery of the key strategic priorities. This includes investment in buying and merchandising systems capability to achieve greater alignment across all sales channels and geographies. 

Any disruption or other adverse event influencing the sustainability of the supply chain

Any of the risks associated with doing business in international markets and/or importing merchandise from these regions could place pressure on margins and profitability or require the Group to divert financial and management resources from more beneficial uses.

This is a decreasing risk as Debenhams is developing multiple sourcing routes to ensure that pricing remains competitive and that demand can be supplied.

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 34.

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.

Any disruption or other adverse event affecting Debenhams' relationship with any of its major suppliers, designers, or concessionaires

Any of the following factors could impact the flow of product across our channels and reduce profitability: costs associated with the transfer of the operations or the potential of extra operational cost from a new provider; changes in exclusivity arrangements with designers or any decline in their popularity; the loss of a number of important concession partners; adverse events within the supply chain which could restrict the availability or significantly increase the cost of goods.

Credit insurance difficulties for a significant number of suppliers could lead to a detrimental variation of terms or alternative suppliers used to source some goods.

In order to minimise the impact of any major supplier, designer or concessionaire relationship or performance issues, Debenhams' objectives are to: maintain close and collaborative relationships by ensuring that strategies are aligned; have appropriate, unambiguous contracts in place; ensure that all major suppliers, designers or concessionaires are financially robust; and have contingency plans in place in the event of a failure

Any disruption or other adverse event affecting Debenhams' relationship with any of its major outsourcing partners

Costs associated with the transfer of the operations or the potential of extra operational cost from a new provider could impact or reduce profitability.

In order to minimise the impact of any major outsourcing partner relationship or performance issues, Debenhams' objectives are to: maintain close and collaborative relationships by ensuring that strategies are aligned; have appropriate, unambiguous contracts in place; ensure that all major outsourcing partners are financially robust; and have contingency plans in place in the event of a failure 

Any disruption or other adverse event affecting Debenhams' relationship with any of its major franchise partners

The loss of a number of important franchise partners could impact or reduce profitability.

In order to minimise the impact of any major franchise partners relationship or performance issues, Debenhams' objectives are to: maintain close and collaborative relationships by ensuring that strategies are aligned; have appropriate, unambiguous contracts in place; ensure that all major franchise partners are financially robust; ensure that geopolitical risks are carefully considered for any new market; and have contingency plans in place in the event of a failure

Policies, controls and financial support behind receivables are in place to help mitigate the risk of franchise partner failure.

Any events that negatively impact the reputation of, or value associated with, Debenhams' brand could adversely affect its business

Unfavourable publicity concerning Debenhams, its ethical trading policies, its business policies including health and safety, its corporate responsibility practices, any of its brands or products, its supply chain practices or any of its franchisees or manufacturers or a substantial erosion in the reputation of, or value associated with, the Debenhams brand may lead to a loss of stakeholder trust and confidence and could have a material adverse effect on Debenhams' ability to attract and retain third party brands, suppliers, designers, concessions and franchisees, which could consequently impact Debenhams' business, financial condition or profitability.

Ethical sourcing, legislative change and corporate responsibility matters are key areas of focus for the sustainability committee. To ensure that Debenhams has the most current information available, it is a member of relevant industry bodies that provide awareness of changes to standards and legislation. All suppliers are expected to adhere to Debenhams' own supplier code of conduct, which is underpinned by Debenhams' robust policy on compliance which includes a real focus on social and ethical standards. A reliance on third party suppliers and franchisees, the challenges of the current economic environment and the complexity of the new and existing legislation makes this an ongoing risk which Debenhams and its suppliers and franchisees have to manage.

A health and safety committee exists to review compliance with legal and regulatory obligations and a number of participants are members of various relevant industry bodies. The committee receives input from specialist teams which focus on discrete aspects. These include health and safety, building services, insurance and retail operations. To support compliance and to maintain high operational standards, health and safety awareness programmes are in place and each site has its own health and safety committee.

Factors outside Debenhams' control, such as damage or interruptions due to operational disruption, natural disaster, pandemics, terrorist activity, strikes or riots may have a material adverse effect on its results

Unable to continue operations smoothly in the event of a major incident which may have an adverse effect on inventory and profitability and divert financial and management resources from more beneficial uses. Any terrorist attacks, armed conflicts, social unrest or other geopolitical uncertainty could result in a significant reduction in consumer confidence and spending levels.

This is an increasing risk based on unpredictable instability of various territories around the world and the increased threat level within the UK.

The business continuity management committee is comprised of senior executives and works to a framework based on the most recent international standard. The key objectives of this committee are to ensure that potential threats to the organisation and the impacts that those threats might cause have been identified, that a framework to build organisational resilience to known threats is in place and that the framework has the capability to deliver an effective response to safeguard the Group.

A business continuity policy, describing roles and responsibilities across the Group, ensures that an effective framework is in place to enable the recovery and continuation of normal business operations as soon as possible in the event of any disruptive incidents. Key business systems are managed and monitored by specialist teams.

Insurance policies have been placed as appropriate to minimise the impact of specific risks.

Currency fluctuations and hedging risks could materially adversely affect Debenhams' earnings and cash flow

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

Hedging strategy may not adequately protect operating results from the impact of exchange rate fluctuations or may limit any benefit caused by favourable movements in exchange rates.

Affect available cash and liquidity and could have material effect on the business, results of operations and financial condition.

This is an increasing risk due to the increasing volatility in this area.

Debenhams has a treasury policy in place which covers counterparty limits and hedging for interest rates, foreign exchange and energy. There is also an internal treasury function which is mandated by the board.

Debenhams closely monitors all aspects of cash management to optimise balance sheet metrics. Effectiveness is measured regularly by management through a series of KPIs.

Business critical spreadsheets and databases used by the finance department have been identified and appropriate control measures are used in line with Debenhams' policy to ensure data integrity.

Factors outside Debenhams' control, such as increases in energy or fuel costs, may have an adverse effect on its results

Place pressure on margin and profitability and will divert financial and management resources from more beneficial uses, reducing profitability.

A key objective of the energy committee is to control energy usage, including the impact of the Carbon Reduction Commitment ("CRC") scheme. An energy hedging policy is in place to provide a high degree of cost certainty in the short term.

Debenhams' business may be materially adversely affected by changes to, or a breach by the Group of, laws or regulations

Adverse effect on inventory and profitability and will divert financial and management resources from more beneficial uses, reducing profitability.

Debenhams has specialist accounting, taxation, information systems and legal and secretariat teams and is also a member of key industry bodies which provide awareness of changes to standards and legislation.

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

Acts of fraud, theft and industrial espionage could adversely affect Debenhams' business operations, reputation and results

Negative effect on reputation and will divert financial and management resources from more beneficial uses, reducing profitability.

In order to mitigate fraud across all channels in which Debenhams operates, a number of preventative measures are in place. These include accounting policies and procedures to ensure, for example, that the retail methodology for valuing stock remains appropriate; systems access restrictions; expenditure authorisation levels; whistleblowing and anti-bribery and corruption policies and a code of business conduct, all of which provide employees with guidelines on how to escalate an issue confidentially. A variety of monitoring mechanisms are used to identify fraudulent activity including data mining across point of sale and head office functions. As part of the organisation-wide risk assessment, individual managers sign an anti-fraud, bribery and corruption declaration. Issues identified are investigated and reported to the Audit Committee.