Debenhams Regulatory News (DEB)

25 October 2018

DEBENHAMS PLC

PRELIMINARY RESULTS AND STRATEGIC UPDATE

Transformation gaining traction in volatile markets, taking decisive action to strengthen base

Retailer Debenhams plc today announces preliminary results for the 52 weeks to 1 September 2018, confirming the EBITDA, pre-exceptional profit before tax and net debt data released on 10 September 2018.

Strategic summary

Good progress on five priority actions under Debenhams Redesigned strategy:

· Delivered above-market digital growth of 12% supported by improved mobile and customer experience

· Sustaining market leadership in Beauty with new strategy designed to drive more choice and digital innovation

· Revitalising fashion product under new leadership; held share in clothing, and gained in womenswear

· Improved in-store experience for customers, with 9 stores trading in new design format and new service model

· Accelerated cost reduction activity with £12m savings achieved, annualising to £20m

Decisive action under way in challenging market conditions to generate cash, reduce debt and reshape store estate:

· Additional cost reductions of c.£50m annualised, taking cumulative cash savings to c.£130m by FY2020

· Revised capex plans for FY2019 of c.£70m, focusing on priority elements of Debenhams Redesigned strategy

· Comprehensive review of store portfolio to address structural challenge and drive profitable growth:

o focusing future investment to deliver Debenhams Redesigned principles on up to 100 stores;

o increasing closure plans from 10, to up to 50 under-performing stores over 3-5 years; and

o developing new lower-cost approach for c.20 stores

· Cash exceptional charges of £12.3m in year, non-cash exceptional write-downs of £512.4m primarily relating to store and lease provisions, systems and impairment to historic goodwill

· In line with stated plan to prioritise debt reduction and cash generation, no final dividend will be paid

Sergio Bucher, CEO, commented:

"It has been a tough year for retail in 2018 and our performance reflects that. We are taking decisive steps to strengthen Debenhams in a market that remains volatile and challenging. Working with our new CFO Rachel Osborne, and the board, I am determined to maintain rigorous cost and capital discipline and to prioritise investment to achieve profitable growth. At the same time, we are taking tough decisions on stores where financial performance is likely to deteriorate over time.

"Debenhams remains a strong and trusted brand with 19m customers shopping with us over the past year. Our transformation strategy is gaining traction, with positive results from new product and new formats, general acclaim for our store of the future in Watford and digital growth that is outpacing the market. With a strengthened balance sheet, we will focus investment behind our strategic priorities and ensure that Debenhams has a sustainable and profitable future."

Financial and Operational Headlines

*before exceptional charges

· Like-for-like sales ("LFL") declined 2.3% with constant currency LFL at (2.7%), with the UK market background remaining volatile in the second half of the year. Whilst our core markets of Fashion and Beauty were weak, we have held share, and driven c.10% growth in UK Food with both owned and concessioned formats performing well

· Digital growth accelerated in H2 to 16%, continuing to outpace the overall market. Mobile demand grew c.20% supported by our agile development programme driving significant improvements in speed and filtering

· Discounting has been a feature of our core markets throughout the past year. As a result, gross margins declined by 140 bps. Terminal stocks were slightly lower than in FY2017 at 2.7%, at the lower end of our normal range

· UK EBITDA declined 35.6% whilst International EBITDA grew by 5.3%, with Magasin du Nord in Denmark delivering further progress despite a weaker market background

· Underlying profit before tax of £33.2m is stated before cash exceptional charges relating to the Debenhams Redesigned strategy of £12.3m and non-cash exceptional write-downs of £512.4m as a result of goodwill and store impairment, lease provisions and systems write-offs

· We continue to evaluate options for non-core assets and will update on any material developments at the appropriate time

· Net debt was in line with previous guidance at £321.3m, giving the Group significant headroom on its committed £520m financing facilities. In addition, we agreed increased headroom on our fixed charge cover.

Presentation

A presentation for analysts and investors will be held today (Thursday 25 October 2018) at 9.00am UK time at Deutsche Bank, Winchester House, 75 London Wall, London, EC2N 2DB. 

The presentation will be webcast live at https://edge.media-server.com/m6/p/uog2s5hb

Enquiries

Analysts and Investors

Katharine Wynne, Debenhams plc 020 3549 6304

Media

Tim Danaher, Brunswick Group 020 7404 5959

Craig Breheny, Brunswick Group 020 7404 5959

STRATEGIC REVIEW

It has been a tough year for UK retail and our trading performance in FY2018 reflects that. Nevertheless, we have seen the first positive signs of results in our Debenhams Redesigned strategy that show our transformation is gaining traction. Against the backdrop of a rapidly-changing retail market, we identified five priority actions in April that would help us to mitigate the effects of a volatile marketplace; that we are able to scale quickly; and are expected be faster-returning. Progress on these activities is covered below.

We have today announced further activity that will address the structural challenges we face as a retailer deriving the majority of sales and operating cashflow from a traditionally-structured store estate. This will allow us to deleverage our capital base whilst continuing to invest behind our key strategic priorities. A total of c.£350m cashflow is expected to be released by FY2020 as a result of this activity, before any asset disposals. These actions are summarised as follows:

• Announcing further cost savings of at least £30m, annualizing to c.£50m by FY2020 - in addition to the annualised £20m already being delivered

• Confirming Capex reduced to c.£70m - approximately half the level of FY2018 - including continuing development spend, and focusing future investment in priority elements of our Debenhams Redesigned strategy

• In line with previously stated intention to retain cash and reduce debt within the business, no final dividend will be paid

• Comprehensive review of portfolio under way, prioritising investment in c.100 stores and closing up to 50 stores over 3-5 years, compared with the 10 previously identified

• Further additional space and rent reduction plans

• Plan to assess returns on new format stores over peak to inform roll-out plans: update on store estate programme in April 2019

• Strategic review of non-core assets announced in June is ongoing

More detailed plans for the store portfolio will be addressed on page 6 below, following the review of FY2018's activity.

OPERATIONAL REVIEW OF THE YEAR

Our five priority focus areas as identified in April 2018 are as follows; below we outline progress and plans in each area:

· Delivered above-market growth in digital sales, as a result of investment in mobile, digital marketing and improved customer experience which has driven mobile demand growth of 20% and smartphone conversion rates up 17%.

· Sustained leadership in Beauty through developing a new strategy that will grow brand and category performance and build closer interaction with our customers via innovative digital and social activity, including the next generation Beauty Club and investment in services provider blow LTD.

· Revitalised our fashion product, with a refresh of our Designer portfolio under way; more frequent newness; significant progress in womenswear; and a new approach to gift for peak season.

· Changed the in-store experience for our customers: we introduced "Service Redesigned" and now have nine stores trading in an upgraded format, with changes to beauty planned in 40, and gift in up to 120 stores for peak.

· Delivered cost reduction activity including restructuring in stores and at our support centres, and the creation of a more flexible operating model. This has saved £12 million in FY2018, above our original target of £10 million, and annualising to £20 million in FY2019.

Priority 1: Deliver above-market growth in digital

What we have done

· We continued to focus on mobile-led improvements, with our agile development programme delivering regular frequent upgrades, based on data analysis. This has delivered significant improvements in speed and filtering.

· We initially focused on upgrades to smartphone experience, but from April 2018 these improvements have been extended to tablet browsing. Mobile devices in total now account for c.60% of digital demand.

· As a result we have seen an acceleration in digital sales, from c.10% in H1 to c.16% in H2, with mobile growth up 20%, supported by a significant improvement in smartphone conversion, up 17%.

What we are going to do

· Using our partnership with digital experience platform Mobify, we are separating our digital customer experience from the underlying platform in a way that allows us to drive faster, positive changes. From February 2019 we will move desktop customers to the Mobify platform, providing a consistent and scalable experience across all our customer-facing digital channels.

· We are building ranges online first so that our largest "store" offers the most exciting and authoritative range and the strongest availability. We are using online analytics to support range decisions based on customer search behaviour - and this will include the introduction of highly sought after 'hot' brands and products.

· We are bringing our channels closer together. We are leveraging the huge growth in local mobile search to raise our visibility on key products and brands and we are working with Google to surface local store information alongside visual shopping ads to drive traffic into stores.

Priority 2: Sustaining leadership in Beauty through digital/social

What we have done

· After some years of strong growth, the UK Beauty market suffered a slowdown in FY2018, with a negative performance in make-up, our strongest category. Together with higher competitor discounting, this affected our overall performance in the financial year, with a decline in growth of (0.8%) in the category. 

· Under the leadership of Richard Cristofoli, MD of the Beauty and Beauty Services business unit, we have developed a new beauty strategy to underpin our leadership in the Premium beauty sector, and to differentiate Debenhams' offer more clearly from newer market entrants.

· We now have two showcases for the "Beauty Hall of the Future" - in our new store in Watford, and our modernised store at Meadowhall. This is an innovative, digitally-integrated format with a significant increase in experiential offers and services and Debenhams-owned content.

What we are going to do

· We are rolling out more flexible "lab" spaces in up to 40 stores pre-peak, introducing 22 new up and coming brands, which will also be available online. We have successfully tested #beautyhub, a multi-brand format that allows smaller stores to offer greater variety of brands in a tighter footprint with shared staffing. These will be introduced to four further stores, with up to eight additional brands in each location.

· We have also identified a number of beauty market opportunities where we under-index or have not previously had an offer, including mini beauty items (for travel and gifting), premium haircare and male grooming product.

· This autumn we have launched the BeautyClub Community; a social media forum for beauty lovers - the first of its kind in the UK. Our 1.3m BeautyClub members and c.0.5m beauty followers across Instagram and Facebook are highly engaged with social media and the Community will transform our relationship with customers and demonstrate digital leadership in the category.

Priority 3: Revitalising fashion product

What we have done

· Following the appointment of Steven Cook, who joined us as MD of Fashion & Home in January 2018, there have been significant changes to the structure of the business unit. With each division and channel now aligned in structure, and with fewer management layers, there is improved accountability.

· The clothing market had a tough year, with the overall market continuing negative in H2[1] according to Kantar data. However we maintained market share overall, and have grown share in womenswear, which is where we are most advanced with the product improvements.

· We have begun the process of refreshing our portfolio of designers, phasing out Ben de Lisi and John Rocha, and introducing London Fashion Week award winner Richard Quinn. With upgraded fabrics in Designers and product that is better differentiated and "true to brand" we have seen faster sell-through despite the wider discount-driven environment.

What we are going to do

· Although we are seeing the strongest sell-through performance in stores with new merchandise presentation, the improvement in fashion and home product touches all stores and our digital channels too.

· This season marks a step forward in womenswear, with around half the own bought range now reflecting better value, better fabrics and improved brand differentiation. So far this is reflected in product turning on average two weeks faster than last year.

· There are also significant improvements to our gift ranges, with around 70% of the range changed from last year and a new cross-category merchandising presentation for the Christmas season. Around 120 stores will benefit from this new presentation for peak.

Priority 4: Changing store experience

What we have done

· We introduced new colleague training last year and have built on this through "service redesigned" in the past 12 months, including looking to recruit more people from the hospitality industry. Together with our efforts to reduce back-of-house activity and increase customer facing time, this has resulted in a 4% improvement in net promoter scores over the year.

· We now have nine stores trading in formats that reflect our new design principles, as tested and refined in our Stevenage store. Stevenage has now passed the anniversary of its opening and has consistently outperformed expectations in its first year of trading, with the highest performance in the chain across average transaction values, rate of full price sell-through, and food penetration.

· We have rolled out seven additional third party food brand offers and improved the menus and service offer in our own-managed food operation. This has resulted in record UK food sales this year, up c10%.

What we are going to do

· Watford opened last month and represents our "store of the future". We have modernised six other stores with varying degrees of spend, including Meadowhall, which also has a full beauty hall refit, and now ranks as our #2 beauty hall overall, second only to Oxford Street. We will assess these stores' performance over peak to determine the appropriate level of investment for store modernisation in the future.

· In the meantime, 40 stores will have elements of our new beauty hall design, 120 will have the new gift presentation and we are rolling out c.75 pop-up food and drink offers.

· We have also launched new branding and marketing which is now consistent across all our communications and acts as a call to action to customers signalling the product changes that will of course be felt in all stores and across our digital channels.

Priority 5: Accelerating cost reduction

What we have done

· In January 2018, we announced a programme of restructuring activity both in-stores and at our support centre, to deliver cost savings of £10m in FY2018, with a further £10m to be delivered in FY2019.

· The activity included reducing management layers, exiting a floor at the London support centre, introducing a new target operating model, restructuring our sourcing operations and continuing to streamline our warehousing and logistics functions. We have reduced our central payroll costs by c.20%, and they are now back to 2010 levels.

· In total we have achieved £12m of savings in FY2018 and secured the further efficiencies to deliver the annualised £20m identified.

What we are going to do

· Market conditions remain volatile and challenging. We are therefore taking a prudent approach and assume no improvement in the trading environment for the foreseeable future. We have identified a further £30m of cost savings for FY2019, annualising to c.£50m by FY2020.

· Key elements of these savings include: further review of support centre overhead; further warehouse consolidation and automation; a further review of central costs following the implementation of the new operating model; and an end-to-end structural review of the business, including the efficiency of the supply chain.

· We are reducing planned capex to c.£70m, with future investment focused on priority, faster-returning projects under our Debenhams Redesigned strategy.

Addressing the structural challenge

What we have done

· Unlike many of our store-based retail peers, we do not have a long tail of loss-making stores. However, our UK occupancy costs (including rent, rates and service charges) account for c£290m or approximately 13% of current GTV. Our analysis shows that approximately 110 of the 165 UK stores are currently over-rented.

· We therefore face a potential annual occupancy cost headwind of c.£12m. We are, however, actively in discussions with landlords about reducing and regearing opportunities to mitigate this headwind, benchmarking against recent changes achieved by some competitors.

· As part of the original store portfolio analysis informing the Debenhams Redesigned strategy, we identified up to 10 stores as at risk of becoming unprofitable and closed two in January 2018, at Eltham and Farnborough. Currently c.10 stores are making small losses following the decline in UK performance in FY2018.

What we are going to do

· We have undertaken a comprehensive review of our portfolio, with a detailed analysis, based on current market trends and looking forward up to five years. As a result, we have identified a further 40 stores beyond the 10 originally identified, that are operating in challenged markets where we no longer see a long term future. They account for approximately 15% of our GTV. All but those stores previously mentioned are currently contributing positively. However, rolling forward current trends, we do not believe they will remain profitable in future years and therefore we intend to exit these stores over the next 3-5 years.

· We have identified a profitable core of up to 100 stores in flagship and vibrant markets where we can see a positive return on future investment. These stores account for c.80% of our GTV and a higher proportion of profit. We will assess the performance delivered by the nine stores now trading with formats reflecting our new design principles over peak, to determine the level and speed of future investment in these stores.

· The balance of approximately 20 stores remain profitable but are not likely to deliver a return on further investment in current markets. We are therefore seeking alternative solutions for these stores, which will vary from store to store depending on local market conditions.

SUMMARY AND OUTLOOK

Generate cash, reduce debt and reshape store estate

· Additional cost savings of at least £30m in FY2019, annualizing to c.£50m by FY2020

· Capex reduced to c.£70m - including continuing development spend

· In line with previously stated intention to prioritise debt reduction and cash generation, no final dividend

· Comprehensive review of portfolio undertaken, leading to decision to close up to 50 stores over 3-5 years

· Further additional space and rent reduction plans

· Assess returns on new format stores over peak to inform roll-out plans

· Update on store estate programme in April

· Strategic asset review yet to conclude

Our vision for the future

We now have a clear vision of what the future of our stores could look like, embodied in our Watford store. With the support of our landlords, we will be able to replicate the key elements of the store of the future across the c.100 stores where we expect to see a positive return.

We are planning for digital to account for approximately 30% of our business, compared with c20% currently, centred around mobile interaction with our customers. We have laid our marker down to build the leading digital platform within the UK beauty market, with the launch of the BeautyClub Community. It is innovative, differentiated and, importantly, integrated with our physical footprint.

We have a differentiated brand proposition, a strong track record of brand building and brand management - and half of what we sell is exclusive to us.

Supported by a restructured operating model, that will create a leaner and more flexible business, Debenhams Redesigned will deliver a sociable, easy and fun shopping experience for our customers and a sustainable and profitable future for our stakeholders.

FINANCIAL REVIEW OF THE YEAR

FINANCIAL SUMMARY

Notes to the above table and to all references in this statement:

1. UK operating segment comprises stores in the UK and digital sales to UK addresses. International operating segment comprises the international franchise stores, the owned stores in Denmark and the Republic of Ireland and digital sales to addresses outside the UK.

2. Gross transaction value (GTV): sales on a gross basis before adjusting for concessions, consignments and staff discounts. Statutory revenue: sales after adjusting for these items.

3. Like-for-like sales movement relates to sales from stores which have been open for more than 12 months plus digital sales.

4. Gross margin: GTV less the value of cost of goods sold, as a percentage of GTV.

5. EBITDA is earnings before interest, taxation, depreciation and amortisation.

6. Before exceptional items, comprising costs associated with the Strategic review: warehouse restructuring, provisions for impairment losses and onerous lease commitments, write off of intangible assets and the impairment of goodwill.

SEGMENTAL PERFORMANCE

UK

Gross transaction value ("GTV") for the UK segment decreased by 2.7% to £2,287.3 million and reported revenue decreased by 3.2% to £1,832.7 million. The GTV decline was a result of a volatile and highly competitive market throughout the year, exacerbated by weak consumer confidence, particularly seen through weaker demand in areas of more discretionary spend. Despite the difficult backdrop, we have made progress in our Destination categories, in particular with UK growth in food categories over last year of c10%. In addition our UK digital growth of 10% grew ahead of the online market.

EBITDA before exceptional charges decreased by 35.6% to £112.0 million as a result of the sales decline and additional markdown required to maintain competitive pricing and market position. The impact of markdown on margin was similar across the first and second half. Operating profit before exceptional costs for the year, after increased depreciation costs arising from increased capital investment in our Debenhams Redesigned strategy, decreased by 88.5% to £8.5 million.

International

In the International segment, gross transaction value of £613.1 million was 1.5% higher than last year and reported revenue increased by 0.5% to £444.3 million. This has been driven by an improvement in performance from Magasin du Nord and the Republic of Ireland, both of which have benefited from strong digital growth. Sales in the franchise business fell 4.6% as a result of the net five closures (nine closures and four store openings) as we continue to optimise the number of partners, and close out some of the low growth categories.

EBITDA grew by 5.3% to £45.3 million, with operating profit increasing by 4.2% to £34.9 million as a result of the sales growth.

GROUP SALES AND PROFITS

Sales and revenue

Group gross transaction value decreased by 1.8% to £2,900.4 million and Group revenue decreased by 2.5% to £2,277.0 million. Group like-for-like sales decreased by 2.3% on a reported basis and 2.7% on a constant currency basis. 

The constant currency like-for-like sales performance reflects the difficult market conditions in FY2018 with lower footfall and heavier discounting having impacted our overall sales. The shift to digital also continued, with like-for-like digital sales growth of 12.3% representing 18.3% of Group gross transaction value (FY2017: 16.0%).

The like‐for‐like sales decline of 2.3% is shown by segment below:

Group own bought mix decreased from 72.4% in 2017 to 71.3% mainly as a result of the movement in the UK mix, with the sales growth from Concessions, especially in food, increasing at a faster rate.

Operating profit[2]

In addition to the effect of lower sales, Group margin rate has been significantly impacted by the additional markdown in response to competitive discounting and to ensure cleaner stock positions as we transition between seasons. This has resulted in a gross margin rate reduction of 140 bps year on year.

Operating costs were well controlled and we delivered additional cost savings in the year to manage to an overall decrease of 0.2% on a reported basis and 0.5% excluding the impact of exchange rate. The decrease reflected our cost savings initiatives of an annualised c£20 million, which were delivered through reorganisation and restructuring activity both in stores and the support centres. Of this c£12 million were delivered in FY2018 with the remainder annualising in FY2019. We introduced a cost savings programme which we expect to deliver a further £30 million (£50 million annualised) in FY2019.

Depreciation and amortisation (including loss on disposal of assets and excluding exceptional items) increased by 4.0% to £113.9 million, reflecting investment in the Debenhams Redesigned strategy.

As a result of the above, Group operating profit, before exceptional costs, was £43.4 million, a decline of 59.6% year on year.

Net finance costs

Net finance costs decreased by 17.1% to £10.2 million benefiting from a £2.0 million pension valuation credit associated with the pension surplus in accordance with IAS 19 revised "Employee benefits" (FY2017: £nil).

Exceptional items

During 2017, the Group announced a new strategy, Debenhams Redesigned, and embarked on a period of significant change, investment and innovation. However, H2 2018 was a period of volatility for the UK retail market as a whole. Debenhams was not insulated from these challenging trading conditions and as a result the business delivered substantially lower profits year on year. This has resulted in revised future growth projections.

Total exceptional costs before taxation recognised during the year in relation to the strategic review, restructuring and a revised outlook of future growth, were £524.7 million (2017: £36.2 million). Of this charge £12.3 million had an in year cash impact. The remaining £512.4 million are non-cash items. The exceptional costs are detailed below:

a) Strategic review and restructuring

Exceptional costs of £13.6 million were incurred as a result of transforming the business in line with the new Debenhams Redesigned strategy including redundancies (including some senior management within the trading division and the support centres), professional fees, and store closure costs.

b) Warehouse restructure

During FY2017 we announced the closure of the distribution centre at Northampton and certain regional warehousing facilities. During FY2018 costs of £11.0 million were recognised relating to one-off transition costs including staff time, and inventory moves.

c) Non cash impairment, write-offs and onerous lease charges

As a result of the FY2018 store performance and reflecting revised future projections, stores at risk of becoming unprofitable over time, and other stores where anticipated future performance would not support the carrying value of assets, have been identified. The overall costs charged in the year were £117.5 million (FY2017: £10.4 million).

In addition, management have assessed whether the goodwill intangible asset, created when the Group was taken private in 2003, will continue to deliver economic benefit in the future. Given the pace of change in retail and our view of future growth rates, previous estimates of future economic benefit have been revised and reduced. As a result a material non-cash impairment charge to goodwill has been made of £302.1 million (FY2017: £nil).

d) IT systems write-off

As a result of the simplification of the organisation and improved consistency in ways of working, a review of IT systems and ongoing projects was undertaken. As a result, the decision was taken to write off a number of previously-established projects with a value of c£80 million.

Profit before tax

Profit before tax before exceptional items decreased by 65.1% to £33.2 million (FY2017: £95.2 million). Reported profit before tax after exceptional items decreased from £59.0 million profit in FY2017 to a £491.5 million loss.

Taxation

Taxation excluding the impact of exceptional items decreased from £17.2 million last year to £5.3 million, principally due to a decrease in reported profits and a lower effective tax rate. The effective tax rate decreased from 18.1% in FY2017 to 16.0% in FY2018 due to a reduction in the headline corporation tax rate and the impact of prior period adjustments.

Profit after tax

Profit after tax but before exceptional items decreased by 64.2% to £27.9 million. Profit after tax after accounting for exceptional items was a loss of £460.2 million.

Share of loss of associate

On 5 September 2017, the Group acquired a stake in blow LTD. for a cash consideration of £7.5 million. For the period from acquisition to 1 September 2018, the Group incurred a £0.8 million charge relating to the share of losses of blow LTD.

Earnings per share

Underlying basic and diluted earnings per share, before exceptional items, decreased by 65.6% to 2.2 pence. The basic weighted average number of shares in issue remained at 1,227.8 million and the diluted weighted average number of shares increased from 1,229.0 million to 1,231.9 million due to issued share options.

Dividends

An interim dividend of 0.500 pence per share was paid to shareholders on 6 July 2018 (FY2017: 1.025 pence), in respect of the 26 weeks ended 3 March 2018 which equated to £6.2 million of shareholders' funds (FY2017: £12.6 million).

The board has decided not to declare a final dividend in order to prioritise generating cash and reducing debt.

CASH FLOW, USES OF CASH AND MOVEMENT IN NET DEBT

Debenhams remains a cash generative business delivering free cash flow of £117.9 million in the year. This was a reduction from £159.9 million in FY2017 as a result of lower EBITDA and increased capital investment. Cash flow generation, the uses of cash and the movement in net debt are summarised below.

Capital expenditure

Total capital expenditure was £143.5 million during the year compared to £124.8 million last year, reflecting the increase in development investment in the store environment in the second half of the year. Looking ahead, we will reduce capital spend and expect it to be c£70 million for FY2019. This reflects a change in priorities toward generating cash and reducing debt.

BALANCE SHEET

Intangible assets

The balance has reduced by £372.5 million in the year to £619.4 million predominantly due to the goodwill impairment of £302.1m and the write-off of largely intangible systems assets of £80.5 million.

Property, Plant and Equipment

The year-end balance of £603.7 million (FY2017: £654.9 million FY2017) has been reduced by an exceptional store impairment charge of £55.8 million.

Inventory

Stock levels increased by 5.9% to £396.0 million, primarily due to the early intake of autumn/winter stock in order to improve availability for the new season. FY2017 has been restated to include owned stock in transit but yet to reach the UK, which was previously excluded from the stock numbers; the corresponding entry being in trade creditors. This has no overall impact on the profits, working capital or cash flows of the Group. Terminal stock levels reduced to 2.7% from 2.8% in 2017, and remain in line with our historical range of 2.5% to 3.5%.

Net Debt

The Group's net debt position as at 1 September 2018 of £321.3 million increased by £45.4 million from the same point last year (FY2017: £275.9 million). The ratio of net debt to EBITDA has increased to 2.0 times from 1.3 times at the end of the previous year, as a result of the fall in profits.

The Group's Revolving Credit Facility ('RCF') of £320 million is in place until June 2020, with an option to extend until June 2021. During the year, the Company made an amendment to its revolving credit facility to increase headroom on the fixed charge cover covenant. In addition, the Group has a £200 million 5.25% Senior Bond in place until July 2021. 

With the actions we have taken to step up our cost savings programme, reduce medium term capital investment and suspend dividends we are focused on building a robust and sustainable financial platform from which to grow.

PENSIONS

The Group provides a number of pension arrangements for its employees. These include the Debenhams Retirement Scheme ("DRS") and the Debenhams Executive Pension Plan ("DEPP") (together "the pension schemes") which both closed for future service accrual from 31 October 2006. On an accounting basis, the net surplus on the Group's pension schemes as at 1 September 2018 was £159.4 million (2 September 2017:£80.9 million). The surplus was driven by a growth in asset values and the reduction in liabilities within the schemes.

On 6 October 2017, the actuarial valuation of the Group's pension schemes at 31 March 2017 was completed, concluding that DEPP was fully funded on a technical provisions basis and on the same basis DRS had improved since the previous actuarial valuation but remained in deficit. Therefore the Group agreed a recovery plan for DRS which was intended to restore the scheme to a fully funded position on an ongoing basis. Under that agreement, the Group agreed to contribute £5.0 million per annum to the pension schemes for the period from 1 September 2017 to 31 March 2022.

The agreement replaced an agreement made in 2015 under which the Group agreed to contribute £9.5 million per annum to the pension schemes for the period from 1 April 2014 to 31 March 2022 increasing by the percentage increase in retail price index ("RPI") over the year to the previous December. Additionally during October 2017, the Group agreed to continue to cover the non-investment expenses and levies of the pension schemes, including those payable to the Pension Protection Fund. 

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties are available on the Group's website at www.debenhamsplc.com and will be detailed in the Group's 2018 Annual Report and Accounts. Reference should be made to the 2018 Annual Report and Accounts for more details on the potential impact of these risks and examples of mitigation.

Whilst the impact of the UK's decision to exit the European Union cannot yet be fully quantified, Debenhams has identified a number of existing risks that would be sensitive to Brexit. These risks continue to be monitored carefully, with appropriate levels of mitigating action being considered as more clarity on the potential transition and end states emerge.

In light of recent press speculation which has encouraged certain credit insurers to hasten the reduction of cover for some of our suppliers, we are working closely with those suppliers to secure stock flows, whilst continuing to manage our working capital tightly. As a result, we have included this risk in our usual going concern stress tests.  

GOING CONCERN

The Group finances its operations through a combination of committed long term borrowing facilities and committed term debt in the form of senior notes. The Group's long term borrowing facilities are structured as a revolving credit facility syndicated across a group of 7 lenders, totalling £320 million and expiring in June 2020. The Group's senior notes total a further £200 million expiring in July 2021. There are two principal financial covenants relating to the Group's debt. The first tests the ratio of net debt relative to Group EBITDA and the second assesses fixed charge cover. Given recent trading, the level of headroom on fixed charge cover reduced over the course of FY2018 and as such the Group successfully renegotiated the fixed charge cover covenant level in July 2018, thus significantly improving headroom against this covenant for the foreseeable future. The net debt to EBITDA covenant level was deemed to be appropriate relative to current and anticipated levels of headroom.

As part of the board's assessment of going concern and ongoing liquidity, forecasts were prepared for the 18 months to February 2020 in order to support the board's conclusions of the ability of the business to continue to operate as a going concern for at least the next 12 months. These forecasts included sensitivities relating to a variety of downside trading outcomes, which recognised the uncertain UK retail environment and allowed the board to assess the level of liquidity and covenant headroom in such scenarios. In addition to these trading scenarios, given the actions of certain credit insurers in recent months, the forecasts were further sensitised for a number of extreme working capital scenarios, which while not seen to date or anticipated, reflect the theoretical impact on liquidity should the Group experience a sustained deterioration in trade associated working capital.

Having assessed the Group's liquidity outlook on the basis of the above projections and sensitivities, the board concluded that the Group would continue to have sufficient headroom to its committed borrowing facilities to ensure it can operate as a going concern for the next 12 months. For this reason the board concluded they could continue to adopt the going concern basis in preparing the financial statements.

BOARD OF DIRECTORS

Mark Rolfe stepped down from the board as an independent non-executive director at the conclusion of the AGM in January 2018, Martina King stepped down from the board as an independent non-executive director on 31 July 2018 following nine years' service, Matt Smith stepped down from the role of Chief Financial Officer on 31 August 2018 and Rachel Osborne was appointed Chief Financial Officer on 17 September 2018. Peter Fitzgerald stepped down from the board as an independent non-executive director on 24 October 2018 following six years' service. The board of directors as at 25 October 2018 is therefore as follows: Sir Ian Cheshire (Chairman), Sergio Bucher (Chief Executive), Rachel Osborne (Chief Financial Officer), Terry Duddy (senior independent director), David Adams (independent non-executive director and Audit chair), Stephen Ingham (independent non‐executive director), Nicky Kinnaird (independent non-executive director and RemCo chair) and Lisa Myers (independent non-executive director).

NOTES TO EDITORS

Debenhams is a leading international, department store destination with a proud British heritage which trades out of 240 department store locations and is available online in more than 90 countries. Debenhams gives its customers around the world a unique, differentiated and exclusive mix of own brands, international brands and concessions.

Debenhams has been investing in design for over 20 years through its exclusive Designers at Debenhams portfolio of brands. Current designers include Abigail Ahern, Jasper Conran, Sadie Frost and Jemima French, Patrick Grant, Henry Holland, Julien Macdonald, Savannah Miller, Jenny Packham, Richard Quinn, Aliza Reger, Justin Thornton and Thea Bregazzi and Matthew Williamson.

Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences and prospects are "forward-looking statements" within the meaning of the United States federal securities laws. These forward-looking statements reflect Debenhams' current expectations concerning future events and actual results may differ materially from current expectations or historical results. Neither the content of the Company's website nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is (or is deemed to be) incorporated into or forms (or is deemed to form) part of this announcement.

Consolidated Income Statement

For the financial year ended 1 September 2018

Earnings per share attributable to owners of the parent

The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information.

Consolidated Statement of Comprehensive Income

For the financial year ended 1 September 2018

The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information.

Consolidated Balance Sheet

As at 1 September 2018

* See note 1 for details

The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information.

Consolidated Statement of Changes in Equity

For the financial year ended 1 September 2018

The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information.

Consolidated Cash Flow Statement

For the financial year ended 1 September 2018

The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information.

1 Basis of preparation

The consolidated financial statements have been prepared on the going concern basis and in accordance with International Financial Reporting Standards ("IFRSs") as adopted for use in the EU and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The consolidated financial statements have been prepared on the basis of the accounting policies set out in the financial statements of Debenhams plc for the 52 weeks ended 1 September 2018. Accounting policies have been consistently applied.

The financial information set out in this document does not constitute the statutory accounts of the Group for the years ended 1 September 2018 and 2 September 2017 but is derived from the 2018 annual report and financial statements. The annual report and financial statements for 2017, which were prepared under IFRS, have been delivered to the Registrar of Companies and the Group's annual report and financial statements for 2018, prepared under IFRS, will be delivered to the Registrar of Companies in due course. The Group's external auditors PricewaterhouseCoopers LLP have reported on these accounts and have given an unqualified report which does not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

Inventory and trade creditor balances for the year ended 2 September 2017 have been restated, to recognise stock in transit from overseas suppliers for which Debenhams has taken title at the year end date, as a result of improved information over the value of this stock. The restatement has resulted in an increase to inventory and trade creditors of £56.3 million. The impact of the restatement on the opening balance as at 4 September 2016 is £56.2 million. This has no overall impact on the profits, working capital or cash flows of the Group.

IFRS 15 "Revenue from Contracts with Customers", was issued in May 2014 and subsequent amendments, "Clarifications to IFRS 15" were issued in April 2016; both have been endorsed by the EU. IFRS 15, as amended, is effective for accounting periods beginning on or after 1 January 2018 and will be adopted by the Group on 2 September 2018.

The standard establishes a principles-based approach for revenue recognition and is based on the concept of recognising revenue for performance obligations only when they are satisfied and the control of goods or services is transferred. In doing so, the standard applies a five-step approach to the timing of revenue recognition and applies to all contracts with customers, except those in the scope of other standards. The Group has completed its assessment of the impact of IFRS 15 and based on the nature of the Group's revenue streams with the recognition of revenue at the point of sale and the absence of significant judgement required in determining the timing of transfer of control, the adoption of IFRS 15 will not have a material impact on the timing or nature of the Group's revenue recognition.

IFRS 9 "Financial Instruments" was issued in July 2014 to replace IAS 39 "Financial Instruments: Recognition and Measurement" and has been endorsed by the EU. The standard is effective for accounting periods beginning on or after 1 January 2018 and will be adopted by the Group on 2 September 2018. IFRS 9 will impact the classification and measurement of the Group's financial instruments, revises the requirements for when hedge accounting can be applied and requires certain additional disclosures. The primary changes resulting from IFRS 9 on the Group's accounting for financial instruments are as follows:

The Group has elected, under IFRS 9, to recognise the full amount of expected credit losses, resulting in the recognition of a loss allowance before the credit loss is incurred. This is applicable to trade receivables, contract assets recorded under IFRS 15 and finance lease receivables at the date of initial recognition of those assets; currently credit losses are only applied against trade receivable debt aged greater than ninety days.

Whilst hedge accounting requirements are revised under IFRS 9, no material changes to the Group's hedge accounting have been identified.

The Group will adopt IFRS 9 with the cumulative retrospective impact on the classification and measurement of financial instruments reflected as an adjustment to equity on the date of adoption.

IFRS 16 "Leases" was issued in January 2016 to replace IAS 17 "Leases" and has been endorsed by the EU. The standard is effective for accounting periods beginning on or after 1 January 2019 and will be adopted by the Group on 1 September 2019.

IFRS 16 will primarily change lease accounting for lessees. Lease agreements will give rise to the recognition of an asset representing the right to use the leased item and an obligation for future lease payables. Lease costs will be recognised in the form of depreciation of the right to use asset and interest on the lease liability, resulting in a higher interest expense in the earlier years of the lease term. The total expense recognised in the Income Statement over the life of the lease will be unaffected by the new standard. However, IFRS 16 will result in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases.

From the work performed to date it is anticipated that implementation of the new standard will have a significant impact on the reported assets and liabilities of the Group. In addition, the implementation of the standard will impact the income statement and classification of cash flows.

1 Basis of preparation (continued)

IFRS 16 will not have any impact on the underlying commercial performance of the Group nor the cash flow generated in the year.

Material judgements are required in identifying and accounting for leases. The most significant judgement areas are expected to be around the determination of the lease term and discount rate. The lease term includes extension periods where it is reasonably certain that a lease extension option will be exercised or that a lease termination option will not be exercised. The discount rate should best represent the rate implicit in the lease or the incremental borrowing rate in order to determine the present value of future lease commitments.

The Group is continuing to assess the impact of the accounting changes on its existing lease portfolio of approximately 250 property leases and other contracts and cannot yet reasonably quantify the impact. Work performed to date includes consideration of the transition approaches available under the standard and collection of relevant data from different areas of the business. The Group has invested in a new property management system to prepare for the adoption of the new standard. Given the complexities of IFRS 16 and the material sensitivity to key assumptions, such as discount rates, it is not yet practicable to fully quantify the effect of IFRS 16 on the financial statements of the Group.

2 Gross transaction value

Revenue from concession and consignment sales is required to be shown on a net basis, being the commission received rather than the gross value achieved on the sale. Management believes that gross transaction value ("GTV"), which presents revenue on a gross basis before adjusting for concessions, consignments and staff discounts, represents a good guide to the overall activity of the Group.

A reconciliation of GTV to external revenue is included in note 3.

3 Segmental reporting

IFRS 8 "Operating Segments" requires disclosure of the operating segments which are reported to the Chief Operating Decision Maker ("CODM"). The CODM has been identified as the executive committee, which includes the executive directors and other key management. It is the executive committee that has responsibility for planning and controlling the activities of the Group.

The Group's reportable segments have been identified as UK and International representing the geographical areas in which the group operates. The UK segment consists of the UK store and online retail business. The International segment consists of subsidiaries in the Republic of Ireland and Denmark, together with international franchise and online operations. Transactions within segments have been eliminated from the information presented below.

The segments are reported to the CODM to operating profit level, using the same accounting policies as applied to the Group accounts. Current assets, current liabilities and non-current liabilities are not reported to or reviewed by the CODM on the basis of operating segment as these are reviewed on a Group-wide basis and therefore these amounts are not presented below.

3 Segmental reporting (continued)

Total segmental operating (loss)/profit may be reconciled to total (loss)/profit before taxation as follows:

Revenues analysed by country, based on the customers' location, are set out below:

Non-current assets, which comprise intangible assets and property, plant and equipment, analysed by country, are set out below:

Additions to intangible assets and property, plant and equipment analysed by operating segment are set out below:

4 Operating (loss)/profit

5 Exceptional items

Exceptional items for the 52 weeks ended 1 September 2018 comprise the following:

As well as the £40.1 million tax credit arising on the exceptional items above, the total tax credit has been reduced by £3.5 million for adjustments arising from the overall loss position of the Group, resulting in a total exceptional tax credit of £36.6 million.

Exceptional items for the 52 weeks ended 2 September 2017 comprise the following:

The period ended 1 September 2018 was the Group's second year of conducting the strategic review and new strategy Debenhams Redesigned together with a planned restructuring of operations encompassing the following areas:

Strategic review and restructuring

Exceptional charges of £13.6 million (2017: £8.0 million) were incurred as a result of transforming the business in line with the new Debenhams Redesigned strategy including redundancies (including some senior management within the trading division and the support centres), professional fees, recruitment costs of key people to help drive the strategy, and costs arising from debt default in certain international markets due to political unrest.

During the period the Group executed a sale and leaseback of a freehold interest. A gain on the sale of £6.0 million was recognised in the exceptional charges above.

Costs incurred in relation to the strategic review and restructuring were considered to be exceptional because the Debenhams Redesigned strategy is a significant change of direction for the business and costs are not considered to be normal operating costs. Further details on the progress of the Debenhams Redesigned strategic review are set out in the CEO's strategic perspective on pages 3 to 7.

5 Exceptional items (continued)

Strategic warehouse restructuring

The Group carried out a strategic review of its warehouse operations which led to a restructuring. As a result, the Group announced the closure of its distribution centre at Northampton and certain regional warehousing facilities and recognised exceptional closure costs of £2.0 million (2017: £6.2 million) relating to accelerated depreciation of assets, dilapidations, onerous lease commitments and redundancy costs.

Exceptional charges of £9.0 million (2017: £3.9 million) were incurred during the financial year relating to one-off transition costs including staff time, training and inventory moves. Part of this restructuring was related to warehouse automation which is an ongoing project over the next year.

Costs incurred in relation to the strategic warehouse are considered to be exceptional because the project is non-recurring and costs are not considered to be normal operating costs.

Asset write-offs

As a result of the simplification of the organisation and improved consistency in ways of working, a review of IT systems and ongoing projects was undertaken. As a result, the decision was taken to write off a number of previously-established projects with a value £77.7 million. A further £1.4 million relating to international assets and £1.4 million relating to the development of a digital platform has been written off.

During the prior period, asset write-offs of legacy IT systems amounted to £5.1 million. These write offs are considered to be exceptional because they are significant in value to the results of the Group and represent a major change in the direction of the IT plan.

Impairment losses and onerous lease charges

As part of the strategic review carried out at the end of the year, the Group revised future projections for all stores to reflect the change of direction. This review identified stores at risk of becoming unprofitable over time and others where anticipated future performance would not support the carrying value of store assets. Exceptional store costs of £117.5 million (2017: store and distribution costs of £13.0 million) relating to impairment of property, plant and equipment, intangible assets and onerous lease charges were recognised as a result.

In addition, management have assessed whether the goodwill intangible asset, created when the Group was privatised in 2003, will continue to deliver economic benefit in the future. Given the pace of change in retail and management's view of future growth rates, previous estimates of future economic benefit have been revised and reduced. As a result a material non-cash impairment charge to goodwill has been made of £302.1 million (FY2017: £nil). These changes are considered to be exceptional because they are significant in value to the results of the Group and reflect a change in direction of the outlook of the business.

6 Employment costs

Wages and salaries include restructuring costs and other termination benefits.

7 Finance income

8 Finance costs

9 Taxation

Analysis of taxation (credit)/charge to the income statement for the financial year:

10 Dividends

A final dividend of 2.4 pence per share (2017: 2.4 pence per share) was paid during the financial year in respect of the financial year ended 2 September 2017, together with an interim dividend of 0.5 pence per share (2017: 1.025 pence per share) in respect of the financial year ended 1 September 2018. The directors have not recommended a final dividend in respect of the financial year ended 1 September 2018 (2017: 2.4 pence per share).

11 (Loss)/earnings per share

Basic (loss)/earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the financial year, excluding any shares purchased by the Company and held as treasury shares. For diluted (loss)/earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one class of dilutive potential ordinary shares; those share options granted to employees where the exercise price is less than the market price of the Company's ordinary shares during the financial year. With respect to the current period, there was no difference in the weighted average number of shares used in the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive.

12 Other non-current liabilities