__a_Review_of_the_Performance_of_Debenhams_in_the_Year_Ending_30th_August_2008

To: shareholders of Debenhams Date: 2009-12-06 From: XXX Subject: A review of the performance of Debenhams in the year ending 30th August 2008 Introduction As we know Debenhams is a leading department stores group in UK. It has 153 stores across UK and Irelands, and 48 international franchise stores in 17 countries. From 2006 to 2008, market share gains from all major clothing categories. The gross transaction value is increased by 1.3%, the full year dividend per share is 3.0P, and the net cash generated from operating activities is 191.4m pounds. The users of the report that I choose is the long-term shareholders of Debenhams where the ownership is separate from the management of the business. They are more appropriately viewed like investors who entrust their money to the company and expect something in return, usually a dividends and a growth in the value of their investment as the company prospers. (Weetman, 1996) They may be also concerned with the risk inherent in as they providing the money to fund a business. They probably need the information to help them make the investment decisions. They also interested in the financial performance information and financial position to help them manage its stewardship of management and cash-generation abilities. In the following steps I will present the financial performance of this year, like non-current assets, profitability and expense etc, and use the ratios analyses to compare and explain the changes in this year. Analytical Review Fist I will analysis the non-current assets, profits, sales and the cost of sales, expenses through the past 3 years to give you an overall review of Debenhams performance. (1) Non-current asset From this graph we can find that the non-current asset in 2008 is less than 2007. In the annual report of 2008, the property , plant and the equipment is only increased by 3.8% which compared with 2007. In 2008, seven new department stores, three re-sited stores and one Desire store opened. So the short-leasehold fixtures and fittings, vehicles, equipments are enhanced. But the financial assets in this year have been reduced as the decrease in the market value charged to the SORIE. (2) Profit From this chart we can see that the profit in 2007 has sharply increased , but in 2008 it gentally decreased. For the reasons that may cause the changes, I will try to analysis using the following chart. (3)sales, cost of sales and expenses As we can see from this graph , when the cost of sales is increased, the sales is also increased in the same trend. And the distribution costs, administractive cost are not changed too much, but the inerest payable and similar charges has decreased from 2007, which means the company has not to pay much money on financial assets or liabilitis. Ratios analysis In this part I will present the ratios which I used in this report to analysis the performance of 2008. What will the investors exactlly to do' They want to sell their shares when the share price is at its highest, so it has to choose the best moment. Then to monitor the perfomence of the company is the way to choose the moment. The expert analysts and fund managers will use ratios to minitoring performance rather than amounts as ratios show changes in relationships of figures wich start to creat a story and start to generat questions.But they do not provide answers.(William,H.B 1999) (1) Investor ratios The most thing that an investor concerned is the bennefit from the investment they have paid, or intend to pay for their shares. There are two measures , one is earnings which referring to the profit available for equity holders. The other is the dividend which is an amount of cash that is paid to the shareholders. For analysis from ivestors prospective , I will use four ratios to indicate. i. Earnings per share =profit after tax for ordinary equity holders/Number of issued ordinary shares 2007 2008 profit after tax for ordinary equity holders 79 77.1 number of issued ordinary shares 859 861.5 earnings per share 9.3 9 It is the most frequently quoted measure of company performance and progress. In 2008, the earnings per share is reduced, which compared with 2007. But it is not too far away from it. According to the annual report of 2008, the profit after tax is decreased by 2.4%. ii. Price-earnings ratio=share price /earnings per share 2007 2008 share price 103 70 earnings per share 9.3 9 price-earnings ratio 11 7.7 The P/E ratio may be interpreted as the number of years for which the currently reported profit is represented by the current share price. It reflects the market’s confidence in future prospects of the company. As for this table, we can see the P/E ratio in 2008 is lower than 2007, which means the period of market believes the current level of earnings may be sustained in 2007. The market confidence in 2008 is not as strong as 2007. The trend of worldwide economy in2008 is become worse, that is one of the most important reasons why the share price is decreased. Compare with the average P/E ratio for the industry of 2008 which is 8.4, the ratio in 2008 is lower than it. May be that will affect the market confidence of investors and their investment decisions. iii. Dividend per share=dividend of the period/number of issued ordinary shares 2007 2008 interim dividend 2.5 2.8 recommended dividend 3.8 0.5 numbers of issued ordinary shares 859 861.7 dividend per share 3.8 0.5 The dividend of the period is combined by two parts. One is interim dividend, another is recommended dividend from directors. According to the 2008 annual report, the final recommended dividend of 0.5 pence per share is to be paid in 16 Jan 2009 and the interim dividend is 2.8. As the same, in 2007, an interim dividend of 2.5 has been paid in July 2007, and the Director has proposing the final dividend in the full year of 3.8 pence per share. From this ratio, shareholders can immediately know how much that it can expect in total dividend. As the profit of 2008 is not decreased too much from 2007, the directors may put the shareholders fund in a high amount to develop the business next year. iv. Dividend cover (payout ratio) =earnings per share /dividend per share 2007 2008 earnings per share 9.3 9 dividend per share 3.8 0.5 dividend cover 2.4 18 Companies always need lots of cash to pay the dividends to shareholders. So when the Directors make dividend decisions, they have to consider two questions. Do we have the sufficient profits' Whether the generated cash will be reinvested in fix or current assets' This ratio is just helping them to answer the questions. Dividend cover shows the number of times that the dividend has been covered by the profits of the year, which means the higher of the ratio, the safer is the dividend. From another point, the companies may hold the new wealth to themselves, properly to invest new assets rather than give them to shareholders as a dividend. According to the dividend policy of many companies, the boards of directors are more like to keep a stability of the dividend cover, or to see the dividend cover increased. From the ratio, we can see in 2008, the dividend cover is much more than 2007; this is a signal to the market that the company has the strong stability in the next year. (2) The analysis of management performance. i. Return on shareholder’s equity=profit after tax for ordinary equity holders / (share capital +reserves)*100% The shareholders may concern about how well did the management make use of the investment, and how they control the costs to maximize the profit derived from the sales' This ratio will give the answer to it. From the shareholder’s viewpoint, the company should use their fund to generate profits successfully which will provide the new wealth to cover the dividend and to finance the future expansion of the business. According to the information that we can get from the annual report and the chart above, the return on shareholders’ equity of 2008 is 68%, which is higher than 48% in 2007. That means the management performance is better than last year, and the use of the investment in assets to create sales has been enhanced. ii. Non-current asset usage=sales/non-current assets*100% 2007 2008 Sales 1774.7 1839.2 non-current assets 1690.2 1635.7 non-current assets usage 1.05 1.12 This ratio shows the performance of a company to generate sales from fixed assets. According to the table, we can see the usage of 2008 is higher than last year, which means one pound of fix asset can gain 1.12pound sales. iii. Operating profit as % of sales=operating profit (before interest and tax)/sales*100% 2007 2008 operating profit 194.1 176.1 Sales 1774.4 1839.2 Percentage 10.90% 9.57% This ratio related to the degree of competiveness in the market, the economic situation, the ability to difference products and the ability to control expenses. (Weetman, 1996) If the ratio is higher, the management performance is more successful. (3)Risk i. Operating gearing=profit before fixed operating costs/Fixed operating costs 2007 2008 profit before fixed operating costs 179.8 176.1 fixed operating costs 85.4 91.5 operating gearing 2.1 1.9 The risk of investment is another important aspect for shareholders. They concern the operating risk which could cause sales to infect on the costs of sales. From this table, we can find out the fixed operating costs of 2008 are increased and the profit before fixed operating costs has been decreased. That means the fixed costs became a greater burden on profit in 2008. Ii .Financial gearing=profit before interest charges / interest charges 2007 2008 profit before interest charges 179.8 176.1 interest charges 70.8 75 financial gearing 2.5 2.3 The financial gearing ratio shows the company has the long-term loan finance which means they has the obligation to pay the interest charges. This is similar to operating risk, if the profit fall and the interest charges increased, that means the financial risk of this company is higher. So according to this table, we can find that the financial gearing in 2008 is more than 2007. From the 2008 annual report , the interest payable on the financial lease and the bank loan and overdraft is enhance than 2007, that makes the interest charges more than last year. (4)Limitations From the ratios that we analysis above, we have an overview of Debenhams performance in 2008. But we should mention that accounting numbers we used in ratio analysis may be affected by difference accounting policy, so it has to be treated with care. Ratios are only to identify further questions about the present position or future directions, but not to answer the question in themselves. (Weetman, 1996) Conclusions In this report, I present why I choose the shareholders as the users of my report, and what they are concerned about' Then I give the tables of non-current assets, profit before tax and sales, costs of sales, expenses to show a significant changes in the recent years. In the main part of the report, I use nine ratios to analysis the performance of Debenhams in 2008, like the investor ratio, it helps shareholders to review the returns that they could get from the shares they hold. In 2008, they will get fewer dividends than last year, but that may because the shareholder’s fond has been increased this year. And, we can monitor the management performance through the return on shareholders’ equity. As for the risk of investment, the two ratios, operating gearing and financial gearing has shown that Debenhams may have a little financial risk this year, but that does not mean it has the worst performance this year. We should consider the whole economy situation and the specific changes of Debenhams to give them a positive evaluation. Personal statements Finally, when I review the process I have to say it is really hard and worthy for me. This is the first time for me to write the financial report using ratios. At the beginning, I read the annual report of Debenhams in 2008, and have an overall impression of it. But I find it is not enough for me to understand the performance of this company, so I found their website, and browse the whole subject of it, maybe some of them are not that useful to present in the report, but It did give me an positive impression of how well they manage the business. But when I used the ratios to analysis the performance of the company, another difficult have come. I cannot find the reserves which required in the analysis of management performance, I read the text book, and find other reading materials, finally I found it in the note of financial statement in the annual report, and I remember what they are. Writing this report is a new experience for me to study this subject. It gives me more confidence to challenge the more difficult research study, and I have learned a study method which is really helpful this time. Reference Pauline, M. (1996) Financial Accounting, Prentice Hall Press Baruch, L. and Paul, Z. (1999) ‘The Boundaries of Financial Reporting and How to Extend Them’ University of Chicago William, H. B (1966) Financial Ratios as Predictors of Failure, University of Chicago Robert, O. E (1972) An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction, University of Washington school of business Turan, G. Ball (2007) A Generalized Extreme Value Approach to Financial Risk Measurement. Journal of Money, Credit and Banking 39:7, 1613-1649 Online publication date: 1-Nov-2007. Pearson, M. (1999) online study skills guide, http:\www.hud.ac.uk\schools\skills \referen.htm, Date accessed 16/9/99. http://www.debenhamsplc.com/