DEBENHAMS PLC PRELIMINARY RESULTS AND STRATEGIC UPDATE Transformation gaining traction in volatile markets, taking decisive action to strengthen base

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1 25 October 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, confirming the EBITDA, pre-exceptional profit before tax and net debt data released on 10 September. 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 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 52 weeks to 1 September () FY FY YOY % change Group gross transaction value 2, ,954.1 (1.8%) Group EBITDA* (27.5%) Underlying profit before tax* (65.1%) Exceptional items (524.7) (36.2) Statutory (loss)/profit before tax (491.5) 59.0 Underlying EPS* (p) Dividend per share (p) 0.50p 3.425p Cash Flow from Operations Net Debt *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 1

2 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 FY 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 ) at 9.00am UK time at Deutsche Bank, Winchester House, 75 London Wall, London, EC2N 2DB. The presentation will be webcast live at Enquiries Analysts and Investors Katharine Wynne, Debenhams plc Media Tim Danaher, Brunswick Group Craig Breheny, Brunswick Group

3 STRATEGIC REVIEW It has been a tough year for UK retail and our trading performance in FY 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 FY 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 FY s activity. OPERATIONAL REVIEW OF THE YEAR Our five priority focus areas as identified in April 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 FY, 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. 3

4 We initially focused on upgrades to smartphone experience, but from April 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 FY, 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, 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. 1 Kantar Worldpanel data to 26 August 4

5 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 discountdriven 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, we announced a programme of restructuring activity both in-stores and at our support centre, to deliver cost savings of 10m in FY, 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 FY and secured the further efficiencies to deliver the annualised 20m identified. 5

6 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, at Eltham and Farnborough. Currently c.10 stores are making small losses following the decline in UK performance in FY. 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. 6

7 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. 7

8 FINANCIAL REVIEW OF THE YEAR FINANCIAL SUMMARY 52 weeks to 1 September Gross transaction value 1,2 UK International Group 2, , weeks to 2 September 2, ,954.1 % change (2.7)% 1.5% (1.8)% Statutory revenue 1,2 UK International Group 1, , , ,335.0 (3.2)% 0.5% (2.5)% Group like-for-like sales movement 3 (2.3)% Group gross margin movement 4 (140) bps EBITDA 1,5,6 UK International Group Operating profit 1,6 UK International Group (35.6)% 5.3% (27.5)% (88.5)% 4.2% (59.6)% Underlying profit before tax (65.1)% Cash exceptional items 6 (12.3) (8.5) Non-cash exceptional items 6 (512.4) (27.7) Reported (Loss) / Profit before tax (491.5) 59.0 Underlying earnings per share 6 2.2p 6.4p Basic (losses) / earnings per share (37.5)p 4.0p Dividend per share 0.500p 3.425p 1 September 2 September Net debt Net debt : EBITDA (last 12 months) 6 2.0x 1.3x 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. 8

9 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 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 million was 1.5% higher than last year and reported revenue increased by 0.5% to 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 FY 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 (FY: 16.0%). The like for like sales decline of 2.3% is shown by segment below: UK stores (6.3%) UK digital 10.0% International 0.2% Like-for-like-sales constant currency (2.7)%) Exchange rate impact 0.4% Like-for-like sales - reported (2.3)%) Group own bought mix decreased from 72.4% in 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 1 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. 1 All items stated before exceptional charges 9

10 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 FY 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 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 (FY: nil). Exceptional items During, the Group announced a new strategy, Debenhams Redesigned, and embarked on a period of significant change, investment and innovation. However, H2 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 million (: 36.2 million). Of this charge 12.3 million had an in year cash impact. The remaining million are non-cash items. The exceptional costs are detailed below: Cash in Non-cash Total year Strategic review & restructuring Warehouse restructure Store impairment & onerous leases Goodwill impairment IT systems and other write-offs Total exceptional costs 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 FY we announced the closure of the distribution centre at Northampton and certain regional warehousing facilities. During FY 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 FY 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 million (FY: 10.4 million). 10

11 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 million (FY: 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 (FY: 95.2 million). Reported profit before tax after exceptional items decreased from 59.0 million profit in FY to a 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 FY to 16.0% in FY 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 million. Share of loss of associate On 5 September, the Group acquired a stake in blow LTD. for a cash consideration of 7.5 million. For the period from acquisition to 1 September, 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 pence per share was paid to shareholders on 6 July (FY: pence), in respect of the 26 weeks ended 3 March which equated to 6.2 million of shareholders funds (FY: 12.6 million). The board has decided not to declare a final dividend in order to prioritise generating cash and reducing debt. 11

12 CASH FLOW, USES OF CASH AND MOVEMENT IN NET DEBT Debenhams remains a cash generative business delivering free cash flow of million in the year. This was a reduction from million in FY 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. 52 weeks to 1 September 52 weeks to 2 September Operating profit before exceptional costs Depreciation, amortisation and loss on disposal Working capital 1.8 (0.7) Cash flow from operations Taxation 1.3 (16.3) Financing (11.0) (11.1) Non-discretionary capital spend (31.5) (29.0) Free cash flow Development capital spend (112.0) (95.8) Dividends paid (35.6) (42.0) Exceptional items (14.5) (15.9) Other movements (1.2) (3.1) Change in net debt (45.4) 3.1 Opening net debt Closing net debt Capital expenditure Total capital expenditure was million during the year compared to 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 1 September 2 September Intangible assets (inc. goodwill) Property, plant and equipment Net Retirement benefit surplus Inventory Other assets Trade & Other payables (615.6) (579.6) Other liabilities (498.9) (452.7) Net debt (321.3) (275.9) Reported Net Assets Intangible assets The balance has reduced by million in the year to million predominantly due to the goodwill impairment of 302.1m and the write-off of largely intangible systems assets of 80.5 million. 12

13 Property, Plant and Equipment The year-end balance of million (FY: million FY) has been reduced by an exceptional store impairment charge of 55.8 million. Inventory Stock levels increased by 5.9% to million, primarily due to the early intake of autumn/winter stock in order to improve availability for the new season. FY 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, 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 of million increased by 45.4 million from the same point last year (FY: 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 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 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 On an accounting basis, the net surplus on the Group s pension schemes as at 1 September was million (2 September : 80.9 million). The surplus was driven by a growth in asset values and the reduction in liabilities within the schemes. On 6 October, the actuarial valuation of the Group s pension schemes at 31 March 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 to 31 March 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, 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. 13

14 PRINCIPAL RISKS AND UNCERTAINTIES The principal risks and uncertainties are available on the Group s website at and will be detailed in the Group's Annual Report and Accounts. Reference should be made to the 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 The Group s senior notes total a further 200 million expiring in July 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 FY and as such the Group successfully renegotiated the fixed charge cover covenant level in July, 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, Martina King stepped down from the board as an independent non-executive director on 31 July following nine years service, Matt Smith stepped down from the role of Chief Financial Officer on 31 August and Rachel Osborne was appointed Chief Financial Officer on 17 September. Peter Fitzgerald stepped down from the board as an independent non-executive director on 24 October following six years service. The board of directors as at 25 October 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 14

15 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. 15

16 Consolidated Income Statement For the financial year ended 1 September 52 weeks ended 1 September 52 weeks ended 2 September Before exceptional items Exceptional items (note 5) Total Before exceptional items Exceptional items (note 5) Total Note Revenue 2, 3 2, , , ,335.0 Cost of sales (2,044.8) (217.1) (2,261.9) (2,046.1) (24.1) (2,070.2) Gross profit (217.1) (24.1) Distribution costs (133.6) (9.4) (143.0) (124.5) (10.6) (135.1) Administrative expenses (55.2) (298.2) (353.4) (56.9) (1.5) (58.4) Operating (loss)/profit (524.7) (481.3) (36.2) 71.3 Finance income Finance costs 8 (12.5) - (12.5) (12.4) - (12.4) (Loss)/profit before taxation 33.2 (524.7) (491.5) 95.2 (36.2) 59.0 Taxation credit/(charge) 9 (5.3) (17.2) 7.0 (10.2) (Loss)/profit for the financial year before share of associate Share of net loss of associate accounted for using the equity method (Loss)/profit for the financial period attributable to equity holders of the parent Company 27.9 (488.1) (460.2) 78.0 (29.2) 48.8 (0.8) - (0.8) (488.1) (461.0) 78.0 (29.2) 48.8 Earnings per share attributable to owners of the parent Pence per share Pence per share Pence per share Pence per share Basic (loss)/earnings per share (37.5) Diluted (loss/earnings per share (37.5) The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information. 16

17 Consolidated Statement of Comprehensive Income For the financial year ended 1 September 52 weeks 52 weeks ended ended 1 September 2 September (Loss)/profit for the financial year (461.0) 48.8 Other comprehensive income Items that will not be reclassified to the income statement Remeasurements of pension schemes Taxation relating to items that will not be reclassified (14.8) (18.5) Items that may be reclassified to the income statement Change in the valuation of available-for-sale investments (0.2) (0.1) Currency translation differences: - Retranslation of overseas subsidiaries (2.8) 5.9 Foreign currency cash flow hedges: - Fair value gains Recycled and adjusted against cost of inventory 2.2 (50.4) Cash flow hedges reclassified and reported in the income statement Taxation relating to items that may be reclassified (3.5) (31.6) Total other comprehensive income Total comprehensive (expense)/income for the financial year (394.3) 75.4 The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information. 17

18 Consolidated Balance Sheet As at 1 September Assets Note 1 September Restated* 2 September Non-current assets Intangible assets Property, plant and equipment Investment in associate Available-for-sale investments Derivative financial instruments Trade and other receivables Retirement benefit surplus Deferred tax assets , ,764.0 Current assets Inventories Trade and other receivables Derivative financial instruments Cash and cash equivalents Liabilities Current liabilities Borrowings (165.6) (116.4) Derivative financial instruments (4.4) (12.0) Trade and other payables (615.6) (579.6) Current tax liabilities (7.3) (9.8) Provisions (14.1) (10.2) (807.0) (728.0) Net current liabilities (278.9) (226.2) Non-current liabilities Borrowings (198.4) (199.5) Derivative financial instruments (0.6) (5.3) Deferred tax liabilities (51.8) (54.0) Other non-current liabilities 12 (354.4) (351.7) Provisions (66.3) (9.7) (671.5) (620.2) Net assets Equity Share capital Share premium account Merger reserve 1, ,200.9 Reverse acquisition reserve (1,199.9) (1,199.9) Hedging reserve 6.4 (6.2) Other reserves (6.5) (3.5) Retained earnings (194.5) Total equity * See note 1 for details The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information. 18

19 Consolidated Statement of Changes in Equity For the financial year ended 1 September Share capital and share premium account Merger reserve Reverse acquisition reserve Hedging reserve Other reserves Retained earnings Total equity Balance at 3 September ,200.9 (1,199.9) 31.2 (9.3) Profit for the financial year Other comprehensive (expense) / income for the financial year (37.4) Total comprehensive (expense) / income for the financial year (37.4) Share-based payment charge Taxation recognised directly in equity Dividends paid (42.0) (42.0) Purchase of shares by the Debenhams Retail Employment Trust (0.8) (0.8) Total transactions with owners (41.7) (41.7) Balance at 2 September ,200.9 (1,199.9) (6.2) (3.5) Loss for the financial year (461.0) (461.0) Other comprehensive income/(expense) for the financial year (3.0) Total comprehensive income/(expense) for the financial year (3.0) (403.9) (394.3) Share-based payment charge Dividends paid (35.6) (35.6) Unclaimed dividends Total transactions with owners (33.9) (33.9) Balance at 1 September ,200.9 (1,199.9) 6.4 (6.5) (194.5) The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information. 19

20 Consolidated Cash Flow Statement For the financial year ended 1 September 52 weeks ended 1 September 52 weeks ended 2 September Note Cash flows from operating activities Cash generated from operations Finance income Finance costs (11.1) (11.2) Tax received/(paid) 1.3 (16.3) Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment (105.3) (72.6) Purchase of intangible assets (30.7) (52.2) Proceeds from the sale of property, plant and equipment Investment in associate (7.5) - - Net cash used in investing activities (136.4) (124.8) Cash flows from financing activities Drawdown/(repayment) of revolving credit facility (25.0) Dividends paid 10 (35.6) (42.0) Purchase of shares by Debenhams Retail Employment Trust (0.8) Finance lease payments (1.6) (1.6) Debt amendment costs (0.8) - Net cash generated from/(used in) financing activities 28.0 (69.4) Net increase/(decrease) in cash and cash equivalents 19.4 (21.2) Net cash and cash equivalents at beginning of financial year Foreign exchange gains on cash and cash equivalents (0.2) 0.1 Net cash and cash equivalents at end of financial year The notes on pages 21 to 31 form an integral part of this condensed consolidated financial information. 20

21 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. 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 and 2 September but is derived from the annual report and financial statements. The annual report and financial statements for, which were prepared under IFRS, have been delivered to the Registrar of Companies and the Group s annual report and financial statements for, 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 Inventory and trade creditor balances for the year ended 2 September 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 and will be adopted by the Group on 2 September. 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 and will be adopted by the Group on 2 September. 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 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. 21