“Our ambition is for Debenhams
to be a leading international,
multi-channel retailer.”Michael Sharp, Chief Executive
Chief Executive's review
This is my first report to shareholders as Chief Executive, although I am far from new to Debenhams. This is a business I am truly passionate about and it is a privilege to lead such a talented and committed team. I want to share with you my thoughts on 2011 and my plans for taking the business forward over the next few years, setting out what I believe is a clear strategy for growth.
Introducing Michael Sharp
The right experience to drive growth
Michael Sharp became Chief Executive of Debenhams on 5 September 2011, having served as Deputy Chief Executive since November 2008. Michael has worked for Debenhams or its predecessor the Burton Group since 1985.
Michael has spent his entire career in retail. In 1985 he joined the Burton Group where he held positions as Buying & Merchandising Controller at Top Man and Burton menswear and Buying & Merchandising Director at Top Man, Topshop and Debenhams’ womenswear. Michael became Managing Director of Principles in 1996 and Managing Director of Racing Green the following year. Michael became Group Trading Director of Debenhams Limited in 1997 and in 2004 was appointed Chief Operating Officer of Debenhams Limited and subsequently Debenhams plc.
2011 highlights
We were pleased with the performance of the business in 2011 despite the difficult trading environment. We have now delivered seven consecutive halves of growth in sales and profit before tax which is a great achievement given the market environment we have faced during this period. You can read about our financial performance in detail here but let me give you some of my highlights of the year.
Gross transaction value, like-for-like-sales including VAT and profit before tax all increased during the year. Another year of strong cash generation saw net debt fall and the dividend reintroduced. Overall these are strong results and are a testament to our pragmatic and flexible approach to trading which aims to maximise cash margin in a challenging market.
Growing market share is a key goal for Debenhams. In 2011 we saw growth in key product categories including menswear and childrenswear (source: Kantar Worldpanel Fashion, 52 weeks to 4 September 2011 vs 2010). We also gained share in women’s casualwear which is one of the product areas we have specifically targeted as an opportunity for market share growth.
We continued to see an excellent performance in health & beauty in 2011. We have a market leading position in the premium market and our share increased by 130 basis points to 28.5% over the past year (source: NPD Health & Beauty market share, 52 weeks to August 2011). Our beauty loyalty scheme Beauty Club, which now has one million members, has undoubtedly driven a large measure of this growth.
One of the biggest challenges this year has been the severe pressure on margins due to rising input costs, in particular higher commodity prices such as cotton. I believe we have managed this well. 2011 has definitely been a year when our first class buying and supply chain infrastructure has been invaluable. This, along with our many years’ experience of direct sourcing and long-standing supplier relationships, has enabled us to remain competitively priced and keep stock levels firmly under control.
In the spring we launched Edition, a new concept under the Designers at Debenhams banner which is investing in some of the most exciting British design talent. Our first designers for spring summer 2011 were Jonathan Saunders, Preen and Jonathan Kelsey and they have now been joined by Roksanda Ilincic for autumn winter 2011. Overall Designers at Debenhams continues to go from strength to strength with sales up by 5.3% in 2011, demonstrating its resilience even in the most difficult markets.
Three new stores were opened during the year in Bath, Wakefield and Fareham and they each performed in line with our expectations. Our store modernisation programme, which recommenced last year, accelerated at pace this year with 11 modernisations completed, including some of our largest, oldest stores such as Gloucester and Southampton. Our customers are clearly as excited about their upgraded stores as we are: the refits are delivering improvements in sales and margins as well as a healthy return on capital.
2011 has seen a step up in the development of our multi-channel business with a host of new developments. Like-for-like online sales increased by 71.9% in 2011 and are up by 224% on a two year basis.
This was the first full year of ownership of our Danish business Magasin du Nord and we were very pleased with the performance of that business. Like-for-like sales increased by 6.3% in local currency and gross margin was up by 200 basis points. We remain on course to meet the targets we set at the time of acquisition in November 2009.
One of the most important projects we have undertaken this year is a comprehensive review of our approach to sustainability. You can read about this in detail here but I want to add my commitment to this project. The way our business interacts with the wider world and meets the needs of all our stakeholders is vital to our success.
Setting a clear strategy for growth
Our ambition is for Debenhams to be a leading international, multichannel retailer. We are aware that every retailer says this. What is different when we say it is our exclusive brand and product portfolio. Half of what we sell cannot be bought anywhere else. Debenhams today is a successful, profitable, cash generative business with strong financial discipline. None of this is going to change. We have been listening to our customers and looking at the way consumer behaviour is changing. Customers tell us we are good at lots of things: exclusive brands especially Designers at Debenhams; broad product categories; services such as personal shopper and gift list; and promotions that offer great value. But they also tell us that our stores could be less cluttered and more modern and contemporary. Importantly, they want more choice: of brands, of products, of ways to shop. As a result, after a period when department stores were perhaps seen as an anachronism on the high street, they are becoming increasingly relevant. As the Wall Street Journal put it recently: “Dowdy department stores start looking cool again.” This gives us a great platform from which to build. We believe there are significant organic opportunities to drive profitable sales growth in Debenhams. Our strategy for growth centres around four pillars: a focus on UK retail; delivering a compelling customer proposition; increasing choice and availability through multi-channel; and expanding the brand internationally.
– Focusing on UK retail
Our UK store portfolio is the engine room of our business. Our ambitions are threefold: to improve the performance of core stores; to complete the modernisation of all core stores within the next two years; and to open new stores in target locations.
There are 45 stores in the UK which have yet to be modernised and which we term “core stores”. These stores all make a cash contribution to the business and deserve their place in the Debenhams estate. However, there are opportunities to improve the performance of these stores and drive sales growth even before they are modernised. We will do this through focus rather than additional cost or capital spend.
Customers’ views of Debenhams are very much coloured by their local store. The condition of our stores varies considerably and so we understand that some customers living near older stores which have not been modernised for some time will have a less favourable view. This needs to change. All of the 45 core stores will be modernised within the next two years, starting with 20 stores in the 2012 financial year. The Oxford Street flagship in Central London will be modernised in 2013. Modernisations drive sales, improve margins and generate good returns on capital. You can read more about the store modernisation programme here.
Despite its long history, Debenhams still has a relatively immature store portfolio in the UK and Ireland of 163 stores. We continue to believe that these markets can together support up to 240 stores without cannibalising sales from existing stores.
– Delivering a compelling customer proposition
The second pillar of our strategy focuses very much on our customers and how we deliver our brand promise of making Designers accessible, offering great value every day and inspiring and helping our customers.
Our brand and product strategy is centred on our unique and differentiated mix of own bought and concession ranges. It remains our target to grow own bought sales participation to 85% over the medium-term but our ultimate focus is on maximising cash margin. Growing Designers at Debenhams is crucial to this goal and our medium-term target is £750 million of sales. You can read more about how we plan to achieve this here. At the same time, our core brands remain very important and there will always be a role for concessions in Debenhams stores. We are looking at the way we communicate our customer proposition, whether through making our instore visual merchandising and product presentation more inspiring or challenging how we spend our marketing budget. And we must not forget service. Although our model is essentially self-service – and customers tell us they are quite happy with that – we need to make sure our store employees have the skills and tools to inspire and help our customers. Using technology to facilitate great customer service will be very important.
You can read more about how we plan to deliver a compelling proposition here.
– Increasing availability and choice through multi-channel
Forecasts suggest that by 2015 47% of all clothing and footwear sales will be “multi-channel”, that is to say they involve customers using more than one access point in a single sale, up from just 28% in 2010 (source: Javelin Consulting). Our multi-channel business has grown very strongly over the past three years with online sales increasing by over 300% during this period. In 2011, online contributed 7.4% of total gross transaction value excluding Magasin. Our ambition is to increase online sales over the medium-term to £500 million. At the centre of our multi-channel strategy is the desire to increase choice and availability. Increasing the choice of products and ways to shop results in more customers and more cross-shopping between product categories. Increasing availability to satisfy demand that is not currently being met drives full price sales which leads to lower markdown and better working capital.
You can read more about the future developments of our multi‑channel business here
– Expanding the brand internationally
In 2011, 16.2% of Debenhams’ total revenue originated outside the UK. Our approach of using franchises in distant and emerging markets, owned assets closer to home and international online delivery is working well and will continue to form the basis of our international strategy.
We are upgrading our ambitions for new franchise store openings and now expect to double the existing store number of 65 over the next five years, 14 of these planned new stores are under contract. We are confident in further growth of Magasin du Nord. Although there are limited opportunities for new store openings in Denmark, the launch of an online proposition in 2012 should deliver incremental sales. Magasin serves as a model for other potential acquisitions and we will continue to assess any opportunities that may arise.
The number of countries we deliver to outside the UK is increasing from the initial seven to 67 in the spring of 2012. The next stage is the launch of local language, local currency websites, starting with Germany in 2012. Our aim is for international to contribute 20% of total multi-channel sales over the medium-term. You can read more about our international ambitions here.
Summary and outlook
In summary, 2011 was a successful year for Debenhams in many ways. Looking forward, we believe there are significant opportunities for growth. Although in the current market environment it is right to remain cautious over the strength of consumer confidence and the health of the overall economy, we are optimistic about our own prospects. In this market there are inevitably winners and losers and I firmly believe that Debenhams is well placed to be one of the winners. I look forward to reporting our progress to you over the coming years.