Creating value for our stakeholders - Debenhams · 2019-03-27 · Creating value for our stakeholders Our resources and relationships How we create value today Innovation and culture

B U S I N E S S M O D E L A N D S T R AT E G Y

Creating value for our stakeholders

Our resources and relationships

How we create value todayInnovation and cultureWe are developing a culture that puts our customers first, enabling product creation and development in an inspiring environment, supported by data-informed decision-making

Developing and managing brandsApproximately half our sales come from our own or exclusive brands. We use the insight from 19 million customers to inform brand development, and to edit and curate the choice of products and brands we sell

Serving our customersWe have worked hard to make shopping easier and more fun for our customers: reducing colleague tasks; equipping them with technology and data; and giving them more time in front of customers

Creating inspiring places to shopWe are reducing clutter in our stores, reducing stock options and improving visual merchandising. We have continued to upgrade our digital presentation for mobile display, to improve conversion

Leveraging partnerships We continue to strengthen our relationships with third parties to broaden our reach. This includes accessing new customers both in the UK and overseas through partners for our own brands, and working with service providers to exploit growth categories, such as food and beauty services in our stores

The value we createWe create value for our stakeholders and our business by carefully managing the use of, and the return on, our resources and relationships

Gross transaction value

£2.9bn

Digital sales growth

12.3%EBITDA*

£157.3mReturn on capital**

9.4%Underlying EPS*

2.2pDirect employment

c26,000* Before exceptional charges. ** Lease-adjusted.

PeopleWe employ around 26,000 colleagues in the UK, the Republic of Ireland, Denmark and in our sourcing offices in Hong Kong and Bangladesh. They support our own-operated stores in the UK and Europe and our digital operations, and serve around 19 million customers

Read more on page 20

Expertise and insightWe recruit and train experts in design, buying and merchandising, supported by excellent creative, marketing, logistics, financial and administrative functions. Our customer insight unit provides us with valuable feedback on our customers’ spending habits and their view of our offer

Read more on page 5

Channels We have 182 stores across major retail locations in the UK, the Republic of Ireland and Denmark. We also have franchised stores across a number of international markets, particularly in the Middle East. We have a flagship digital store in the UK and a localised online service in a number of overseas markets. Our UK website is one of the top online UK retail destinations with over 300 million visits each year

Read more on pages 6 and 7

Suppliers and partnersWe have a well-established network of more than 1,000 suppliers, as well as concession, logistics and franchise partners, who provide us with high quality product, logistical support and local market expertise in locations where we trade with a partner


FinanceWe have a strong balance sheet, with flexible financing provision through a £320 million financing facility and a £200 million bond, which are available until 2020 and 2021 respectively. These resources are more than adequate to provide working capital and support our capital spending programme including investment in our strategic priorities.


Our value creation is underpinned by

Risk managementA systematic approach to managing risk to ensure strategic goals are met


GovernanceA governance framework designed to safeguard long-term shareholder value

Read more on pages 46 to 51

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Debenhams plc Annual Report & Accounts 2018

What we doWe aim to make shopping confidence-boosting, sociable and fun for our customers, through our 240 department store destinations and online in more than 90 countries. We give our customers around the world a unique, differentiated and exclusive mix of own brands, international brands and concessions.

The value we share

How we aim to maximise value through our strategy

DestinationBy making Debenhams more of a Destination, especially for Beauty and beauty services; Fashion and accessories; and Food and events, we will grow “Social Shopping” and increase frequency of visits

DigitalBy using mobile to integrate our channels and become the primary means of interacting with our customers, we will increase loyalty and personalisation and broaden our reach

DifferentBy being different in how we create and manage our brands and product, we will increase innovation and differentiation, building the desirability and value of our brands

Underpinned by Simplify & FocusBy simplifying our operations and processes and focusing on doing fewer things better, we will increase the efficiency of our business


By running a profitable, sustainable, responsible business, we create value which is used to strengthen our financial position, invested to enable growth and shared with all of our stakeholders

Customers We invest in our stores and integrated digital offer (2018 capex of £143.5 million in order to provide our customers with an inspiring environment and a convenient customer journey


ShareholdersWe have paid a dividend (2018: £35.6 million) although the board has decided not to pay a final dividend to retain cash in the business and reduce debt at this time


ColleaguesWe invest in training and support for our colleagues in order to enable them to create and manage brands and to serve our customers well


SuppliersWe source globally from more than 1,000 suppliers adopting ethical trading principles. We have increased our business through direct sourcing operations in Hong Kong and Bangladesh


CommunitiesWe raised £1.3 million through Group activities in 2018 to support charitable giving and community involvement


EnvironmentWe seek to operate our stores, logistics and sourcing operations in a way that minimises the use of energy and resources


SustainabilityIntroducing “doing our bit”, Debenhams’ new approach to CSR


CultureTaking a customer first approach, fostering innovative thinking underpinned by data


Social Shopping

Simplify & Focus

Destination Digital Different

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M A R K E T C O N T E X T

2018: a tough year for retailers – and it’s not over yet

Our market context commentary comes from a research report, from broker Citi, published on 25 July 2018.

“Two years on from the Brexit vote, we take a more positive view on Citi’s UK measure of Household Available Cashflow (HAC) for 2019 and 2020 although we expect disposable income to remain subdued for the remainder of 2018.

So far in 2018, the UK has seen extreme weather conditions, from snow in March to a summer heatwave. This has had more of an impact on retail sales than any underlying change in consumer behaviour. Given the long-standing structural headwinds of online challenging the store-based retail model, we have remained cautious on the more traditional retailers, and sentiment has been negatively affected by high profile retail failures.

Very weak footfall in 2018

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Online growth is slowing but the shift from instore to online continues

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For the majority of UK consumers, the only real impact from Brexit has been higher inflation due to weak sterling and an increased cost of holidays. Arguably the economy has proven more resilient than many feared, albeit still at a slightly lower growth rate than would otherwise have been the case. However, given the impending deadline for an agreement, large domestic employers are now calling for information on exactly how Brexit will be enacted before they can confirm investment plans.

Consumer confidence has bounced off its recent lows but is still lower than the pre-Brexit vote level

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0.3%growth in Household Available Cashflow in 2018

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UK consumers feeling better about their personal financial situation

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Compared to 12m agoExpectations in next 12m

Source: Citi Research

Looking at the data from our regular UK consumer survey of 1,200 respondents on their spending intentions, it supports a positive outlook for online and discount retail, while indicating continuing weakness in home-related spending. It does indicate an improving outlook for UK clothing – where spending intentions are better than expected. However, we believe that trends in spend still favour online and value players rather than the traditional retailers.

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The demand environment remains uncertain for 2018 with the final Brexit agreement creating significant volatility in terms of the outlook for the important peak trading period for retailers. As we look into 2019, a better demand and operating cost environment than in the previous two years should help offset any incremental gross margin pressure.

• UK consumer demand likely to rebound in 2019 – 2018 is likely to be the low point for consumer disposable income with a recovery as inflation fades. The UK HAC points to just

+0.3% implied like-for-like improvement in 2018 before a projected rebound to +1.3% in 2019 and +1.5% in 2020. Over the next year, by category the UK consumer survey sees net intentions to spend more in Food, Discount retail and Clothing with less in other categories. However, we are not expecting a strong increase in consumption compared to history and much of this spend will likely be transferred online. The direction of Brexit negotiations will also affect confidence and, therefore, willingness to spend

• Store closures are starting to see a benefit in terms of sales transfer both from own estate and competitor closures – The upside of the structural challenges for the remaining retailers is the benefit of a pick-up in sales from retailers such as House of Fraser, Homebase and Toys’R’Us closing stores as well as the benefit from sales transfer from reducing the size of their own store estates (Dixons Carphone, M&S)

• Gross margin headwind for 2019 on FX and commodities – However, we assume a negative outlook for gross margins for UK clothing retailers as foreign exchange, cotton prices and freight have all moved against the sector

• Less operating cost pressure than we have seen in recent years – This should be mitigated by the lower level of minimum wage inflation at c+4.5%, lower average rents as lease renewals drive downwards pressure, a possible freeze on business rates for retailers, and less of a step-up in IT and warehousing investment

Where could we be wrong?The main risk to our more constructive view for 2019 is the increased political uncertainty over Brexit. This would likely delay investment and curtail employment growth, as well as negatively impact sterling. Citi’s view is that GBP/USD is the single most important macro driver of the UK retail sector followed by consumer confidence, and both of these could be under pressure without a satisfactory Brexit agreement.

There is also a risk that increasing employment fears drive an increase in the savings rate given its historic low level and the high level of consumer debt. This would see any increase in disposable income revert to shoring up personal finances. An upside risk is post-Brexit inward investment stepping back up given the removal of uncertainty, or a reversal of leisure spend back towards retail.”

+4.5%National Minimum Wage inflation

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C E O ’ S S T R AT E G I C P E R S P E C T I V E

“After a huge amount of change behind the scenes,

we’re starting to see evidence of progress.”

Sergio BucherChief Executive Officer

ear shareholder, It has been a tough year for UK retail and our trading performance in FY2018 reflects

that. Nevertheless, we are encouraged

by the signs that our transformation is gaining

traction. We have been reshaping our business, taking some hard decisions, including announcing more store closures, to make sure that Debenhams is in a strong financial position to trade successfully in a highly competitive and promotional marketplace. I would like to thank all my colleagues for their resilience and support in delivering the necessary changes and building the foundations for our transformation of Debenhams.

We announced our new strategy, Debenhams Redesigned, in April 2017. see the framework of our strategy below and Strategy In Action (SIA) pages 10 to 19. The strategy aimed to address the challenges that face department store retailing and to create a business that makes shopping confidence boosting, sociable and fun for our customers. In order

to deliver our strategy, we needed to restructure the organisation to make it simpler, leaner and more nimble. We have made huge progress with this reorganisation and we have assembled a strong management team.

Five key priorities identifiedAt our interims in April, acknowledging the rapid change in our industry, we identified five priority actions within our strategy that will help mitigate the trading environment; that are scalable; and that will deliver positive returns. These priorities are:

• Delivering above-market digital sales growth driven by technological change focused on mobile

• Sustaining leadership in Beauty through innovative customer engagement both instore and online

• Revitalising fashion product under new leadership, with Designers@Debenhams reinvention under way

• Changing the instore experience for customers through our redesigned service model and store presentation

• Accelerating cost reduction activity to underpin announced annualised savings of £20 million

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A strategy that aims to create shareholder value

Debenhams RedesignedOur objective is to build a successful future for Debenhams against a fast changing background, with a mission to make shopping confidence-boosting, sociable and fun. Our plan is to transform the shopping experience at Debenhams, creating great reasons for our customers to come to us whether they are sitting at home, commuting to work or enjoying leisure time browsing in stores. The strategic framework illustrates our Debenhams Redesigned strategy:

Destination 2

We aim to make Debenhams a destination for Social Shopping by focusing on three key areas to grow: Beauty and beauty services; Fashion via accessories; and food and events – which we call Meet me @ Debenhams. If we can be higher in our customer’s consideration for these categories, this will increase frequency of visits. Our customers visit us less frequently than some of our peers and by exploiting our market-leading position in premium beauty; encouraging cross-shopping between fashion and accessories and creating exciting places to eat and drink, we can increase traffic and spend per customer.

Different 3 4

We are redesigning the culture at Debenhams, from being process-driven, to customer-led. We aim to foster creativity and innovation, underpinned by data-driven decision-making. We are reinventing Designers@Debenhams, making the proposition more relevant and managing our brand portfolio more robustly. We are building ranges for our online customers first. By being different in how we create and manage our brands and products; we will build their desirability and value.

Digital 1

Growth in mobile demand is driving growth in UK non-food retail sales and is a significant opportunity overseas. We saw continuing rapid growth in mobile demand in 2018 of 20%, and it now accounts for almost 60% of UK Group digital sales. By using mobile to integrate our channels and become the primary means of interacting with our customers, we will increase loyalty and personalisation and broaden our reach. We intend to increase our digital distribution both through our own infrastructure and via strategic partnerships.

Strength in digital sales growthDebenhams is one of the top ten most visited retail websites in the UK and a clear destination at peak shopping dates in the calendar. We have delivered strong growth in digital sales in FY2018, up 12% to £530 million. This accelerated well ahead of the wider market in H2, driven by continuing agile development focused on mobile. The smartphone is increasingly the centre of our interaction with customers and mobile demand accounts for over half our digital sales. Our partnership with Mobify, a digital experience platform, has successfully delivered a faster, more responsive mobile website and improved customer experience. We plan to extend this to our customers shopping via their desktops and expect to continue to drive profitable, above-market growth in the coming year.

Sustaining leadership in BeautyDebenhams is a leader in the UK premium beauty market, which has slowed this year after several years of strong growth. Our Beauty Redesigned strategy aims to sustain our leadership through making our beauty halls even more of a Destination, through

driving Digital engagement with our customers and offering Different brands and categories where we see growth opportunities. We took a minority stake in digital beauty services provider blow LTD. Our Beauty Hall of the Future has opened in two locations; our new store in Watford and our modernised store at Meadowhall, with elements of our new thinking being rolled out to more stores. We have launched the BeautyClub Community, a social media platform for beauty devotees, where our 1.3m BeautyClub members and instore beauty consultants can share advice, tips and recommendations, building content and gaining rewards based on their participation. This is an exciting development, the first of its kind in the UK, that brings our channels together, tapping into a highly socially-engaged customer.

Revitalising fashion productUnder the leadership of Steven Cook (see overleaf), we have restructured the organisation of our Fashion & Home business unit: reducing complexity, aligning the management of the trading divisions and improving accountability.

1 Above market growth

2 Growth in beauty through digital/social

3 Improve fashion product

4 Change instore experience

5 Deliver cost reduction activity

Underpinned by Simplify & Focus 5

We have reviewed our processes and the way we do business in all areas to simplify them and improve our flexibility, with the aim of making more effective use of our people, our inventory and our infrastructure, including how we generate and deploy our cash. We have now started to address the structural challenge within our store estate: segmenting the portfolio between the investable core; those markets we plan to exit; and a low cost model for the balance of the UK chain.

This strategy will deliver growth and efficiency over the next three years and beyond, delivering an enhanced experience for our customers, helping our colleagues to serve our customers better and creating value for our shareholders.

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Introducing our new CFO, Rachel Osborne Rachel joined in September 2018. She was previously CFO at Domino’s Pizza Group plc and has also held finance roles at both Kingfisher plc and the John Lewis Partnership.


C E O ’ S S T R AT E G I C P E R S P E C T I V EC O N T I N U E D

This will underpin our work to differentiate our brands better. We are revitalising Designers@Debenhams, which remains an important asset of the business, with some changes to our portfolio of Designers. The first collection from our newest partner, Richard Quinn, winner of the London Fashion Week Queen Elizabeth II award, was very well received. In those brands where our work is most advanced, we have seen a strong improvement in full price sell-through.

Changing instore experienceWe started our work on instore experience by addressing some of the issues that have hindered our customers from enjoying their shopping experience with us. We introduced customer service measures to our KPIs and in FY2018 we have seen a significant improvement in our net promoter scores. Building on the lessons from our store “test-lab” at Stevenage we restarted our store investment programme, with six stores, Uxbridge, Westfield, Reading, Cambridge, Leicester and Meadowhall, being modernised in time for the autumn season. We have opened our “store of the future” at Watford, which brings together our latest thinking instore presentation and layout. We are assessing how to focus our investment plans, within a lower capex budget to deliver the best returns.

Accelerating cost reduction activityWe announced in January that we were working on a new, more flexible operating model that would result in reorganisation and restructuring activity both in our stores and support centre. We have reduced the layers of management, taking out 320 roles in stores and c300 roles in the support centre, delivering £12 million of cost savings in FY2018, and secured further efficiencies to deliver the annualised £20 million identified. 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 £30 million of cost savings for FY2019, annualising to c£50 million by FY2020.

Strengthening our financial positionAs well as driving out further cost opportunities beyond those already announced, we are focusing on self-help and prioritising cash generation. In order to give us maximum flexibility amidst difficult trading conditions we are taking the opportunity to strengthen our balance sheet further. Whilst still pushing ahead with key strategic initiatives, we are planning for a material reduction in FY2019 capital expenditure to £70 million. As a result, we expect net debt to be lower in FY2019 than in FY2018. We are also conducting a strategic review of non-core assets, aiming to focus investment behind our strategy.

Debenhams management teamThe team delivering the transformation of Debenhams

Executive committee (left to right):David SmithMD of International

Angela MorrisonTechnology and Supply Chain Director

Sally HyndmanHR Director

Ross ClemmowMD of Retail, Digital, Food & Events

Steven CookMD of Fashion & Home

Sergio BucherCEO

Rachel OsborneCFO

Richard Cristofoli MD of Marketing & Beauty Services


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Strategic report

Putting Debenhams on firmer foundationsEarly evidence of strategic progress

SEPTEMBER 2017Debenhams announces partnership with blow LTD to drive beauty services growth

Opens first southern hemisphere store in Melbourne, Australia

JANUARY 2018Steven Cook joins as MD, Fashion & Home

Debenhams reports tough Christmas trading, but strong digital performance

Initiates move towards new operating model and confirms £20 million cost saving target

MAY 2018New Designer collaboration with Richard Quinn launches

MARCH 2018Furniture trials with partners Maisons du Monde and Swoon open in Westfield

JUNE 2018Q3 trading update notes deterioration in market environment

Announce strategic review of non-core assets

APRIL 2018Interims introduce five priority actions under Redesigned strategy

Confirms de-layered management structure both in stores and at support centre

AUGUST 2018First Sweat! gym opens at Sutton, Surrey

Appointment of new CFO, Rachel Osborne

OCTOBER 2017Preliminary results and strategic update introducing new KPIs

First downsized store launched at Uxbridge

Looking differentThe Debenhams Redesigned strategy sets out to reinvent the shopping experience for customers. Whilst we have made real improvements to our stores and continue to improve our product offering, we also want to signify clearly to customers that Debenhams is changing and give them more reasons to come instore – our new brand identity signals the next phase in our continued transformation. You will see it on our website, in all our communications, especially on social and digital platforms, and in our new and modernised stores.

Store of the futureI am as convinced as ever that the high street has a big role to play in the future of retail. We invited some of our stakeholders to see our vision of the future of department stores, as displayed at our new store in Watford. It is obvious that online platforms, including ours, provide a very convenient way of shopping. However, shopping is one of the favourite hobbies for many people around the world and particularly in the UK. If the high street wants to compete, we need to make sure that every shopping trip has a little something that is memorable: the product, the experience, the service, the environment, the food, the drinks, the friends. Watford brings to life what we call Social Shopping: that is, shopping as a fun experience you can do on your own or share with friends, with family, wrapped in a set of digital experiences. Watford will form the template for the future revitalisation of our store portfolio, which will underpin the transformation of your company.

Changes to the senior teamWe have said Hello and Goodbye to some members of the senior team. In January, we welcomed an important new member of the executive committee, Steven Cook, who has joined from Holt Renfrew as Managing Director of Fashion & Home. I would like to take a moment to thank Matt Smith, our CFO, who left in August 2018, for his contribution to Debenhams over the past three years including developing and shaping the strategy and strengthening our financial position. I am delighted that we have appointed a very able successor to Matt in Rachel Osborne, who has joined us from Dominos plc, with invaluable experience across retail and consumer-facing businesses. I’d also like to thank Paul Eardley, who served most ably as Company Secretary for 11 years. We all hope he enjoys his well-earned retirement.

Sergio Bucher Chief Executive Officer 25 October 2018






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S T R AT E G Y I N A C T I O N

estinationOur priority actions to sustain leadership in Beauty and to improve the shopping experience for our customers underpin our mission

to make shopping fun, social and easy, as well as being key to encouraging our customers to visit us more often.

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Beauty products and services What we have doneOur first two Beauty Halls of the Future have opened at Watford and Meadowhall. We have trialled a new multi-brand format – #beautyhub – that will extend choice in smaller stores. We launched three blow bars offering beauty services in our stores at London Oxford Street, Birmingham and Manchester.

What we are going to doWe plan to roll out elements of our Beauty Hall of the Future to 40 further stores before peak trading. We see opportunities in mini beauty products (for travel and gift) and growth in categories such as skincare and male grooming.


Fashion via accessoriesWhat we have doneDebenhams has maintained a 5% share in the UK clothing market, supported by leading market positions in important accessories categories (eg bags, swimwear, branded lingerie). We have assembled a new leadership team in Fashion & Home, with a restructured organisation.

What we are going to doWe will see a step forward in product this autumn, particularly in womenswear. We are increasing the emphasis on newness, introducing new brands, “new this week” hubs and more capsule collections in our own brands. We have seen a strong customer response to trials of an enhanced service proposition in footwear and lingerie.


Meet me @ debenhamsWhat we have doneWe have continued to roll out new food and drink offers with exciting new brand partners, such as Franco Manca and Nando’s. This has driven a record year in food sales. We trialled our own in-house developed fresh and healthy food offer, Loaf & Bloom, and upgraded menus and service in our instore restaurants. As well as our established VIP evenings before Christmas, we hosted a national “Summer School of Beauty” event in June.

What we are going to doWe are adding 75 pop-up food offers before Christmas, including gin bars, as seen at Watford. We are testing another in-house developed concept, The Kitchen, for a different customer demographic. As the nationwide destination for shopping events, we are expanding our event programme with privileged access for our VIP customers.

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igitalOne of our five priority actions is to continue to deliver

above market growth in digital. Mobile is becoming the primary means of interacting with our customers;

we aim to increase loyalty and personalisation.

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Mobile@everywhereWhat we have doneFY2018 growth in UK digital sales of 10% compares with UK market growth of c7% (according to the BRC) and was powered by strong mobile demand, which now accounts for c60% of online orders. Through our partnership with progressive web application Mobify, our work to improve the customer journey has grown smartphone conversion rates by 17%.

What we are going to doOur progressive web application development will gradually replace functionality in our existing web platform and give us all the flexibility of an app. All our development work is mobile first as this is the focus of how we are building customer loyalty and personalisation.


Click & CollectWhat we have doneNext day click & collect accounts for over 30% of online orders and drives store footfall. We have been testing a partnership with Doddle in 50 stores, providing collection services for other retailers’ orders. We have announced this will be extended to all stores.

What we are going to doOur modernised stores show how we can transform the click & collect service to be engaging and sociable as well as a convenient and reliable service. Linking the service with personal shopping and other activities will make click & collect a leisure experience in its own right.


BeautyClub CommunityWhat we have doneOur BeautyClub card loyalty scheme has more than 1.3m members and we have over half a million followers on Facebook and Instagram. We also have more than 6,000 beauty experts in our stores. We have developed our own social media platform using an established software provider to access the community of highly digitally-engaged beauty consumers.

What we are going to doWe are creating a digital destination, accessed via Debenhams.com, bringing together beauty beginners, enthusiasts and experts in a fun, rewarding and safe space to connect and share their passion by asking questions, offering knowledge and giving authentic advice. Users will be able to earn rewards from their participation. The BeautyClub Community is the first of its kind in the UK and has met with an enthusiastic early response.

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ifferent branding

We aim to foster creativity and innovation, underpinned by data-driven decision-making. We have launched

new branding and marketing which is consistent across all our communications and acts as a call to action to customers signalling

changes to product, presentation and environment.

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do a bit of


Innovation and cultureWhat we have doneWe have reorganised the way we operate into three business units that are aligned with our strategy: Beauty & Beauty services; Fashion & Home; and Food & Events. With clearer lines of responsibility and a holistic view of each division we are already seeing better collaboration and visibility of data. Our “Service Redesigned” programme included dedicated training and incentives and a mystery shopper programme. As a result we have delivered a significant improvement in net promoter scores.

What we are going to doOur new structure for Fashion & Home is buyer-led and design-driven, supported by a centralised planning function. This will improve accountability, align activity across channels and markets and lead to faster decision-making.


Brand matrixWhat we have doneWe have a strong track record of brand creation, with a number of our brands generating annual turnover of over £100 million, making them sizeable businesses in their own right. We have taken some of these brands back to their roots, restoring a clear brand identity, with positive early results, for example at Principles and Star by Julien Macdonald.

What we are going to doWe are rolling out a new brand identity – our first for 20 years – which aims to alert our customers to the changes at Debenhams and encourage brand reappraisal. We are proud of the Debenhams brand and are bringing together our entry level product in home under this label. We are managing our gift offer differently, with 70% of the range changed for this Christmas. We are starting to build ranges online first, editing store ranges based on online catchment data.


Designers@DebenhamsWhat we have doneOur long-standing collaboration with designers remains a core attraction for customers and an important point of differentiation for Debenhams. In line with a more robust portfolio approach, we are phasing out Ben de Lisi and John Rocha and have introduced a capsule collection from London Fashion Week award-winner Richard Quinn.

What we are going to doFollowing positive early results from upgrading fabric quality for some of our newer designers, we are extending this further across the portfolio. We plan to offer “little black dresses” from each designer to make Debenhams the destination for partywear this season.

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Simplify & Focus

In light of rapid market change, we accelerated our cost reduction programme to deliver annualised savings of £20 million. A leaner operating model,

with fewer management layers, is delivering faster decision-making and potential to drive out further efficiencies.

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New operating modelWhat we have doneWe identified the opportunity for £20 million cost savings. We reduced the number of roles across our store estate by 320 whilst increasing customer-facing hours. At our support centre, we have streamlined the number of management layers from 17 to nine and reduced the space and occupancy cost in our London office by 20%.

What we are going to doWe have identified further cost opportunities that should deliver additional cumulative annual savings of c£70 million by FY2020. Whilst the market remains volatile and uncertain, we will continue to look for further efficiency savings to offset inflationary headwinds.


More efficient use of resourcesWhat we have doneWe have created two key sourcing hubs in Hong Kong and Bangladesh to drive standard and efficient ways of working that support a leaner and more flexible UK sourcing structure.

What we are going to doOur aim is to achieve a more flexible and customer-led supply chain, supporting more frequent product newness whilst also delivering better availability on continuity lines. We are maintaining our investment in warehouse automation, which will reduce fulfilment costs.


Store estateWhat we have doneWe closed two stores of the ten that we had identified for potential closure as a result of our initial portfolio review. We have modernised six stores, including a downsized store at Uxbridge, building on the lessons from our award-winning Stevenage store.

What we are going to doWe have again reviewed our store estate in light of the rapidly-changing market environment. As a result we have segmented our stores into those locations that will deliver a good return on investment, in line with the principles embodied at our “store of the future” in Watford; those locations in lower-performing markets where we see risk that they will become unprofitable and so will exit; and the balance which remain profitable but are unlikely to justify future investment. We are working closely with landlords to align rents to the market.

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InternationalWe are adapting Debenhams Redesigned to our International operations,

looking to leverage and grow successful partnerships through both franchised and wholesale relationships, and increasing our digital presence.

We continue to exit lower-growth, lower-potential markets.

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Leverage and grow successful partnershipsWhat we have doneWe have strong partnerships in markets such as the Middle East, which account for around half our franchise operations. We opened a flagship store in Kuwait, and a new store in Riyadh. Wholesale customer sales grew over 50%, with strong growth via our digital partner Zalando. We have launched a mobile site for international e-commerce.

What we are going to doOur international teams have been reorganised to align with our new business unit structure and this will underpin our future franchise service model. As we focus on fewer partners, we will be able to pursue our ambition to develop a multi-channel offering in key international markets.

SimplifyWhat we have doneWe are continuing to review our international market presence. In FY2018 we closed a net five franchise stores, exiting two markets, mainly in Eastern Europe.

What we are going to doWe are testing and learning from marketplace and wholesale models in order to prioritise investment. We are working with our international partners to introduce customer-led methodology for product selection and we are developing an agile design, sourcing and buying operation to support targeted international product.

DenmarkWhat we have doneMagasin du Nord remains the largest profit-generating entity within International. It has invested in its flagship Copenhagen store and introduced 75 new brands. Digital growth has continued to be exceptionally strong.

What we are going to doOur first new store for 12 years opened in Aalborg in September, taking the chain to seven. We plan to take Magasin beyond its domestic market, as the destination for the best of Scandinavian design, with digital entry to another Nordic market planned this year.

Debenhams Avenues, Kuwait

Beauty Hall, Copenhagen, Kgs Nytorv

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Equality Community Environment

doingour bitEquality Community Environment

doingour bit


doingour bit


doingour bit


doingour bit


doingour bit


doingour bit


doingour bit


doingour bit


doingour bit

“ We are committed to five of the United Nation Sustainable Development Goals of the BRC Better Retail, Better World Initiative.”

R E S O U R C E S , R E L AT I O N S H I P S A N D S U S TA I N A B I L I T Y

This year we have launched our CSR strategy “Doing our bit” which is focused on three strands: Equality – striving for equality and diversity throughout our workforce and supply chain; Community – being an active part of the communities in which we serve; and Environment – reducing, reusing and recycling all that we do to the best of our abilities.

We have executive committee sponsorship for the overall programme as well as members focusing on specific strands. We have underpinned our strategy by signing up to the BRC Better Retail, Better World Initiative which concentrates on five of the 17 United Nation Sustainability Development Goals which align to our three strands (see diagram above).

EQUALITY

To ensure we strive for equality and diversity throughout our workforce and supply chain, we are focusing on our colleagues and our partners colleagues.

Our colleaguesWe directly employ around 26,000 colleagues globally. We work hard at ensuring our colleagues are kept informed and offer two-way communications through a regular drumbeat of messages. These include newsletters, video diaries from our CEO and broader leadership group, leadership events and cascades, weekly huddles, live Yammer Q&A with the members of the executive committee, regular floor walks on major announcements and breakfast sessions. We also organise activities for colleagues, such as bring your dogs to work days and wellbeing days.

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Our behavioursWe have worked with colleagues from across the business to redefine our culture through creating a set of behaviours (see above diagram) to support the delivery of Debenhams Redesigned, harnessing the best of what we have today together with the cultural shifts needed to achieve our mission of making shopping confidence-boosting, sociable and fun. Our new behaviours complement the customer service behaviours rolled out to stores which are designed to drive a customer-led business.

Equal opportunitiesWe are committed to ensuring that colleagues are treated equally, regardless of gender, sexual orientation, religion or belief, age, mental status, social class, colour, race, ethnic origin, creed, disability, political or philosophical beliefs, or marital or civil partnership status.

Through our equal opportunities policy, we aim to create an environment that offers all colleagues the chance to use their skills and talent. Decisions on recruitment, training, promotion and employment conditions are based solely on objective, job-related criteria, and personal competence and performance.

We seek wherever possible to make reasonable adjustments to ensure that a colleague who becomes disabled during the course of his or her employment is able to continue working effectively. This includes providing equipment or altering working arrangements; providing additional training; re-allocating on a temporary or permanent basis some of the colleague’s duties to other members of staff; transferring the colleague to a suitable alternative role; and adjusting working times. Any such adjustment will be monitored and reviewed on a regular basis to ensure it continues to be effective.

We are confident that our men and women are paid equally for doing equivalent jobs across our business and have an equal opportunity to participate in and earn incentives. Our current recruitment, progression, performance, reward and benefit policies and practices are not gender biased and we will continue to monitor them to ensure they remain fair and equitable.

We use gender pay data to inform talent targets, policies and processes to support the progression of women into more senior roles.

Our gender pay and bonus gap calculations include all UK colleagues employed by Debenhams Retail plc and in the spirit of being open and transparent we have chosen to include executive directors to give a complete picture. Our next gender pay gap report will be published in March 2019.

Building a pipeline of future leadersWe adopt a consistent approach to identify and develop talent across the stores and the support centres. We also use a consistent framework to develop our leaders of the future. We participate in the 30% club mentoring scheme, delivered by Women Ahead. This aims to develop a broader pipeline of women and achieve a gender balance at all levels. We also have three female leaders taking part in Retail Week’s Be Inspired Senior Leadership Academy.

Diversity of candidates is key to us. We are growing followers on our social media recruitment channels, including LinkedIn, and the launch of a Debenhams Facebook Careers Page to build engagement and stay connected with a diverse audience of potential candidates for roles within Debenhams.

ENERGYWe are proud to work here; we’re passionate

about our products and passionate

about customers.

ONE TEAMTogether we are

stronger, we trust and support each other to deliver results.

OWNERSHIPWe take personal

responsibility for results, we thrive on change and

make things happen.

AMBITIONWe love a challenge;

we stretch ourselves to be successful; we’re bold, we’re brave,

we’re creative.

OUR BEHAVIOURS

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During FY2018 the Ethical Trade team conducted over 450 factory visits, to support remediation, conduct training and support implementation of corrective actions identified within the third party audit. This would have included: critical non-compliances, indicators of Modern Slavery, young workers, health and safety issues, wage violations, excessive working hours, lack of legal employment contracts and discrimination against migrant labour.

Top ten sourcing countries

Countries Factory Count Total workers

China 486 125,081

Bangladesh 67 165,043

India 122 44,608

Cambodia 23 17,200

Turkey 45 11,262

Sri Lanka 34 19,003

Vietnam 24 8,003

Romania 18 4,555

Pakistan 16 31,368

United Kingdom 23 2,198

Source: Aug 2018

34sourcing countries

475suppliers

450+visits to factories

We continue to support suppliers through training and awareness so that they can take ownership of their remediation plans, which would include collaboration with other retailers and local actors to work on key issues.

We have achieved this by providing training on the empowerment of women and their communities, focusing on:

• Challenging gender stereotypes• Health & wellbeing• Financial literacy & inclusion

Open to both male and female employees, with the aim to educate and reduce gender inequality, whilst promoting diversity and inclusion.

R E S O U R C E S , R E L AT I O N S H I P S A N D S U S TA I N A B I L I T YC O N T I N U E D

ApprenticeshipsWe continue to support apprenticeships in retail with 50 colleagues in England now getting ready for end point assessment in spring 2019, when they will achieve the Level 3 Team Leader Standard.

In line with our plan, we have started to explore the introduction of apprenticeships in specialist areas in the support centres, creating career paths for school leavers, with the appropriate skill set, who prefer a work-based learning programme to university.

Recruiting externally and upskilling existing colleagues through apprenticeships provides us with a pipeline of talent for the future. We continue to feed back to the National Apprenticeship Service on the development of occupational standards and quality of apprenticeships.

Our partners’ colleaguesOur partners’ programme is primarily supported by the Ethical Trade and Corporate Responsibility teams who sit within the sourcing division, forming part of the wider business function Fashion & Home. This structure supports alignment of the Ethical Trade strategy with the over-arching Sourcing strategy, focusing on the salient risks and labour rights issues, therefore embedding responsible sourcing into the companies purchasing practices.

We operate a continuous monitoring programme which assesses all factories making own brand product, against the Supplier Code of Conduct. This is done through either an independent third party ethical audit or a remediation visit by Ethical Trade team members based in the UK, Hong Kong and Bangladesh.

China Capacity programme

• sharing working best practices• 39 factories• 16,000 workers in China

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HUMAN RIGHTS & MODERN SLAVERY As a fundamental part of our Supplier Code of Conduct, we respect International principles of Human Rights, including but not limited to those expressed in our Human Rights Policy, UN Declaration of Human Rights, United Nations Guiding Principles, Sustainable Development Goals and those principles contained within the Modern Slavery Act 2015.

All Ethical Trade policies have ownership at company board level, with the aim to protect the employee welfare and basic human rights within our supply chains. These policies have been made in line with the UN guiding principles and are influenced by civil society, unions, NGOs, multi-stakeholder and brand collaboration.

Over the past 12 months we have made the following changes to our company policies and processes, to support improvement of Human Rights within the supply chain:

• Modern Slavery clause is now integrated into all contracts (Conditions of Trading), including those made with our supplier partners and service providers

• We re-evaluated the Supplier Code of Conduct and made amendments referring to conventions related to International Principles of Human Rights, United Nation Guiding Principles and Modern Slavery Act

• The scope of our policies has been expanded to include goods not for resale (GNFR), service and labour providers, who support and operate within our business

• Continued the use of the Fast Forward programme to assess our own brand manufacturing sites in the UK, including warehouses and GNFR. The assessment programme helps us identify indicators of Modern Slavery and includes worker-voice feedback

• The full Tier 1 factory list is now publicly disclosed on our website as part of our ongoing pledge to support transparency

• Reinforce our partnership with our suppliers by providing capacity building through programmes such as China Capacity Building and ILO Better Work

A full version of Debenhams’ statement on Modern Slavery is on our website at www.sustainability.debenhamsplc.com.

SWASTI LIFE

• Focuses on Health & Wellbeing, Financial Literacy and Gender Violence Awareness.

• Impacts 5,000 workers in India

We have already seen positive results with the current SWASTI LIFE women empowerment programme in India, which we now plan to expand into other sourcing countries within the supply chain. Other existing programmes include, HER Finance supporting digital banking for Bangladesh factory workers and sexual harassment training conducted by ILO Better Work in Vietnam and Cambodia.

For more information, visit our webpage at www.sustainability.debenhamsplc.com/ethical-trade.

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COMMUNITY

Supporting the local communities in which we serve is very important. For many years we have raised funds for national charity partners that have a presence across the UK and ROI and more recently, we have built on this foundation as part of our Doing Our Bit strategy.

FundraisingThis year we raised £1.3 million for our national charity partners: Look Good Feel Better; Help For Heroes; Breast Cancer Now; Children In Need; and Make A Wish Ireland. These funds are generated from a variety of activities including: a donation of profits from the sale of exclusive products; the sale of charity partners’ merchandise; an annual supplier and business partner funded charity ball; as well as a range of colleague challenges from a 500km bike ride to bake sales. Customer and colleague donations raised throughout the year, linked to specific events and causes, complete the effort in both stores and our support centres.

We also raise funds and make donations to the Debenhams Retirement Association, the retailTRUST and Regent’s Place Community Fund. In addition, outdated and surplus stock is donated to the Salvation Army Trading Company.

VolunteeringThis year we have developed a number of volunteering initiatives to enable our colleagues to support our partner charities. Over 400 of the beauty sales consultants have voluntarily completed training with Look Good Feel Better to advise those undergoing treatment for cancer on how to deal with physical side effects.

A number of our London Support Centre colleagues have more recently volunteered to become mentors for the C4WS Jobs Club as part of its support for the Regent’s Place Community Fund. In addition, colleagues are also invited to support fundraising activities in stores on a voluntary basis.

Local communitiesWe have a number of initiatives in place to support activities taking place in the areas that we serve including hosting Look Good Feel Better workshops in a number of our stores where customers can receive advice and support from trained colleagues. In addition, we have worked with Help For Heroes to support the Band of Sisters programme, creating respite areas in our restaurants for partners of service personnel who have been wounded, injured or sick as a result of their service, to meet and socialise.

Colleague awardsThis year we invested in recognising our colleagues for the work that they do to raise funds, reduce our impact on the environment and support the local community with the first Doing Our Bit Awards. Colleagues were presented with awards by our Chief Executive at our annual charity ball in recognition for their efforts in these areas.


£1.3mraised for national charities

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ENVIRONMENT

Reducing, reusing and recycling all that we do to the best of our abilities is a far reaching challenge. We have created five focus areas to ensure we minimise our impact on the environment, namely: energy; emissions; waste; water; and sustain.

EnergyWe are committed to continuously improving the energy efficiency of our buildings and operations. This has driven a material reduction in this year’s carbon footprint. In FY2018; we invested over £3 million and retrofitted LED lighting in 12 stores. These projects have not only delivered excellent results in reducing energy use, but have also led to a more comfortable customer environment. For FY2019 we will be focusing on energy savings that can be achieved through behavioural change, primarily through the use of energy alerts that will be sent to store management teams if they breach energy thresholds.

EmissionsWe cover emissions in three ways: greenhouse gas; carbon; and chemicals.

We have reported our greenhouse gas (GHG) emissions for our UK, Irish and Danish operations since FY2008. Since then, our footprint boundary has evolved to include areas such as other international offices, packaging, production of hangers, and

manufacture of catalogues, brochures and direct mail. This section provides a breakdown of our GHG emissions for this year. Further details of our GHG emissions can be found on our website www.sustainability.debenhamsplc.com.

With the support of Ricardo Energy & Environment, we have applied the GHG Protocol Corporate Accounting and Reporting Standard (revised edition), and the UK Government Conversion Factors for Company Reporting, 2018, to calculate our carbon emissions. Our annual reporting year is 3 September 2017 to 1 September 2018 and we report GHG emissions in line with this period. We have followed the GHG Protocol’s new, scope 2 emissions reporting guidance and used two different quantification methods: location-based1 and market-based, as in previous years. Scope 2 emissions, using the market-based method, are lower than with the location-based approach, mainly because of our decision to purchase 100% renewable electricity in the Republic of Ireland and Northern Ireland.

This year, our overall carbon footprint has decreased by 21%, from 177,611 tonnes CO2e in FY2017 to 140,352 tonnes CO2e (using the location-based approach). Table 1 below provides a breakdown of these figures.

1 The location-based method reflects the average emissions intensity of grids on which energy consumption occurs, whereas the market-based method reflects emissions from the electricity that companies have chosen in the market (or their lack of choice).

Table 1: Absolute GHG emissions from scope 1, 2 and 3 shown in tonnes CO2e

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

Scope 1 17,786 15,989 19,668 14,241 13,721 9,135

Scope 2 (location-based) 139,607 149,068 139,354 125,453 103,754 81,887

Scope 2 (market-based) Not calculated; market-based method was introduced in FY2016

113,134 81,914 78,091

Scope 3 16,687 28,308 31,908 64,442 60,137 49,329

Total 174,080 193,365 190,930 204,136* 177,611* 140,352*

* Total emissions calculated using the location-based scope 2 emissions figure.

Carbon footprint down

21%

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Emissions data are made more meaningful when compared to a core business variable. We have used intensity ratios, alongside the absolute figures provided above, to report our GHG emissions in the context of our annual turnover and premises floor area.

Table 2 (below) shows the total annual turnover and floor area for the whole business. The total absolute emissions are then divided by these figures to provide tonnes of CO2e per million pounds of turnover and tonnes of CO2e per m2 of floor area, respectively, as shown in Table 3 (below).

These tables show that the tonnes CO2e for both intensity metrics have also decreased.

Table 2: Data used for intensity measurements

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

Turnover (GTV £m) 2,777 2,824 2,860 2,939 2,954 2,900

Total floor area*(m2) 1,808,398 1,850,874 1,867,291 1,876,533 1,873,568 1,904,937**

* This total floor area includes back of store, offices and distribution centres.** For FY2018 the accuracy of the calculation of the back of store areas was improved, causing an increase in total

floor area.

Table 3: Assessment of absolute footprint emissions

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

Absolute emissions (tCO2e) 174,080 193,365 190,930 204,136* 177,611* 140,352*

Absolute tCO2e / £m Turnover 63 68 67 69 60 48

Absolute tCO2e / m2 0.096 0.104 0.102 0.109 0.095 0.074

* Total emissions calculated using the location-based scope 2 emissions figure.

The carbon footprint has decreased across all three scopes this year compared to FY2017. The main reasons for the decrease in the overall emissions is due to a reduction in: electricity consumption, including the associated grid losses (32% reduction) and air imports (27% reduction).

We have a carbon reduction target to reduce Group-wide scope 1 and 2 absolute operational CO2e emissions by 10% by FY2020 against our FY2008 baseline. The FY2018 scope 1 and scope 2 total emissions have reduced by 47% compared to the scope 1 and 2 CO2e emissions in FY2008.

Overall, the progress on improvement and monitoring management remains stringent and during the next few years towards FY2020, we aim to continue to positively contribute to the Better Retail Climate as part of our drive to save energy and protect the environment.

Our aim is to further reduce and or eradicate harmful chemicals where industry alternatives are available.

Restricted Substances List is available for suppliers whereby limit values are stated in line with REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) and governed by global regulations.

WasteAs a business 97% of our waste doesn’t go to landfill, the majority of this is a result of recycling our product packaging. To further improve this, we have a number of initiatives to reduce, reuse and recycle all that we touch. This year we introduced 100% recycled bags for Life and also standardised our hangers, reducing the number of types from 1000 to 50, enabling much easier reuse.

We have a relationship with Salvation Army to recycle our stores’ “not quite perfect” product. In FY2017 we donated 6.3 tonnes of product. Within our support centres, TRAID collected 6.9 tonnes of samples in FY2018. Going forward the Salvation Army will cover both stores and the support centres.


100%Bags for life are made from 100% recycled plastic

Reused and recycledHangers have been standardised and are reused and recycled back into the supply chain several times

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WaterAs part of our supply chain mapping programme, we will be reviewing the environmental impact of manufacturing, including reducing the consumption of water. The priority will be to focus on beyond Tier 1 supplier production sites, that require heavy water use, such as fabric mills, tanneries and other wet processing units, to actively work with our supplier partners to monitor and reduce their water usage through sustainable alternatives.

For denim production we are already using Avol oxy white, which reduces water usage and eliminates use of hazardous chemicals.

SustainWe aim to continue the work around responsible sourcing and consumption through:

• Purchasing practices: Creating improvements around purchasing practices to provide a positive social and environmental impact within our supply chains. This will be done through education of our support centres’ colleagues and engagement with collaborative industry initiatives, such as ACT Living Wage and the ETI (Ethical Trading Initiative)

• Sustainable Product Initiatives: Establishing the Sustainable Product Working group, with an aim to focus on sustainable CSR initiatives from a product perspective with a shared approach across Fashion & Home. The first activity for the working group was to research the current sustainable cotton initiatives, and to recommend the most suitable initiative for us. Future projects are to focus on other sustainable materials and fibres. Sustainable product is already within the business – REPREVE Denim. This contains recycled materials such as plastic bottles and so results in the reduction of the use of petroleum and the emission of greenhouse gases

• Educating our customers: We continue to share information around sustainability via our public website and as of FY2019 we will be introducing instore CSR Ambassadors, who will engage with our customers to promote Debenhams sustainability initiatives. Debenhams carries out testing to ensure all products we sell are fit for purpose, also educating our customers on caring for their items post purchase. This is with the aim to significantly and positively extend the longevity of the product life cycle

NON-FINANCIAL REPORTING COMPLIANCE STATEMENTThe following table lists the policies we have in place to support and govern our CSR strategy, “Doing our bit”. In accordance with the Non-Financial Reporting regulations, details of each policy, our governance, their implementation and management, can be found on our website www.sustainability.debenhamsplc.com.

Non-financial reporting matter Our policies

Environmental Matters • Environmental and Chemical • Supplier Code of Conduct

Employees • Code of Business Conduct• Health & Safety at Work

• Bullying and Harassment• Colleague Privacy

Human Rights • Human Rights• Modern Slavery Statement

• Information Security• Data Protection

Social Matters • Supporting Charities

Anti-corruption and anti-bribery

• Anti-bribery and Corruption • Whistleblowing

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We established Key Performance Indicators (KPIs) under the Debenhams Redesigned strategy, linked to the Destination categories where Debenhams is targeting growth. More information on how management remuneration is linked can be found in the remuneration report starting on page 64. We have also maintained sustainable KPIs that ensure that the management of resources and relationships remains core to our business model.

All income statement numbers for FY2016 are given on a 52 week basis.

Group financial KPIs Strategic KPIs Sustainability KPI

Like-for-like saleschange (%)

2016 0.6

2017

2018 (2.3)

2.1

Underlying profitbefore tax* (£m)

2016 114.1

2017

2018 33.2

95.2

Beauty & beautyservices – gross transactionvalue growth (%)

2016

2017

2018 (0.8)

6.0

4.8

Growth in UK Food, drink & events – gross transactionvalue growth (%)

2016 13.1

2017

2018 9.6

8.6

Carbon emissions(CO2e 000 tonnes)

2016 204

2017

2018 140

178

RationaleLike-for-like (LFL) is a measure of the annual performance of stores that have been open for at least one year, plus digital sales growth, from our UK and international business.

2018 performanceGroup LFL sales decreased by 2.3%. When adjusted for foreign exchange translation, constant currency LFL decreased by 2.7%, with a UK LFL decrease of 3.4% and international LFL growth of 0.2%.

RationaleUnderlying profit before tax (PBT) is our principal measure of profitability, and excludes items that are one-off in nature.

2018 performanceUnderlying PBT* declined by 65.1% to £33.2 million. This follows a 27.5% decline in EBITDA, with an increase in depreciation charges as a result of previous capital investment.

* Before exceptional items (FY2018: £524.7 million; FY2017: £36.2 million; FY2016: £12.4 million).

RationaleCore destination category in which Debenhams will sustain market leadership.

2018 performanceIn a market where growth has slowed, Beauty category sales declined by 0.8%. This reflected a decline in the make-up market, mitigated by growth in perfumery and skincare, and a strong performance in digital.

Rationale“Meet me @ Debenhams” is a core destination category that drives frequency of visits.

2018 performanceUK Food and drink gross transaction value (GTV) grew by 9.6% driven by further new third party brand introductions, and improved performance from our own in-house restaurants.

RationaleCO2e is used as a measure of environmental impact. It takes into account harmful emissions from the six greenhouse gases identified by the Kyoto Protocol.

2018 performanceEmissions declined by 21%. This reflects a reduction in electricity consumption, supported by rolling out LED store lighting, and reduced air freight.

Underlying earningsper share* (pence)

2016 7.5

2017

2018 2.2

6.4

Return on capital employed* (%)

2016 11.8

2017

2018 9.4

11.1

Net debt (£m)

2016 279.0

2017

2018 321.3

275.9

Growth in mobile penetration – mix of demand (%)

2016 48.2

2017

2018 58.0

55.0

Accelerating warehouse automation – online costimprovement (bpsimprovement to GTV)

2016 40

2017

2018 80

70

RationaleBasic earnings per share (EPS) divides earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the financial year.

2018 performanceUnderlying EPS* declined by 65.6% to 2.2p, after a reduction in profit after tax.


RationaleReturn on capital employed (ROCE) measures the profitability of the Company relative to the size of assets used to generate returns.

2018 performanceUnderlying ROCE declined from 11.1% to 9.4% reflecting the fall in profitability in the year.

* Lease-adjusted before exceptional items.

RationaleNet debt measures Group borrowings net of cash held at the balance sheet date, and reflects the movement in cash generated by the business after cash expenses.

2018 performanceIncluding cash outflow relating to the exceptional restructuring charges, year end net debt has increased to £321.3 million.

RationaleMobile@everywhere will be the primary form of customer interaction unifying channels and building loyalty.

2018 performanceMobile demand grew by 20%, outpacing desktop demand and accounting for 58% of digital orders.

RationaleDriving efficiency through investment in warehouse automation to improve digital profitability.

2018 performanceFulfilment cost ratios improved by 80 bps as a result of efficiencies made.

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We established Key Performance Indicators (KPIs) under the Debenhams Redesigned strategy, linked to the Destination categories where Debenhams is targeting growth. More information on how management remuneration is linked can be found in the remuneration report starting on page 64. We have also maintained sustainable KPIs that ensure that the management of resources and relationships remains core to our business model.

All income statement numbers for FY2016 are given on a 52 week basis.

Group financial KPIs Strategic KPIs Sustainability KPI

Like-for-like saleschange (%)

2016 0.6

2017

2018 (2.3)

2.1

Underlying profitbefore tax* (£m)

2016 114.1

2017

2018 33.2

95.2

Beauty & beautyservices – gross transactionvalue growth (%)

2016

2017

2018 (0.8)

6.0

4.8

Growth in UK Food, drink & events – gross transactionvalue growth (%)

2016 13.1

2017

2018 9.6

8.6

Carbon emissions(CO2e 000 tonnes)

2016 204

2017

2018 140

178

RationaleLike-for-like (LFL) is a measure of the annual performance of stores that have been open for at least one year, plus digital sales growth, from our UK and international business.

2018 performanceGroup LFL sales decreased by 2.3%. When adjusted for foreign exchange translation, constant currency LFL decreased by 2.7%, with a UK LFL decrease of 3.4% and international LFL growth of 0.2%.

RationaleUnderlying profit before tax (PBT) is our principal measure of profitability, and excludes items that are one-off in nature.

2018 performanceUnderlying PBT* declined by 65.1% to £33.2 million. This follows a 27.5% decline in EBITDA, with an increase in depreciation charges as a result of previous capital investment.


RationaleCore destination category in which Debenhams will sustain market leadership.

2018 performanceIn a market where growth has slowed, Beauty category sales declined by 0.8%. This reflected a decline in the make-up market, mitigated by growth in perfumery and skincare, and a strong performance in digital.

Rationale“Meet me @ Debenhams” is a core destination category that drives frequency of visits.

2018 performanceUK Food and drink gross transaction value (GTV) grew by 9.6% driven by further new third party brand introductions, and improved performance from our own in-house restaurants.

RationaleCO2e is used as a measure of environmental impact. It takes into account harmful emissions from the six greenhouse gases identified by the Kyoto Protocol.

2018 performanceEmissions declined by 21%. This reflects a reduction in electricity consumption, supported by rolling out LED store lighting, and reduced air freight.

Underlying earningsper share* (pence)

2016 7.5

2017

2018 2.2

6.4

Return on capital employed* (%)

2016 11.8

2017

2018 9.4

11.1

Net debt (£m)

2016 279.0

2017

2018 321.3

275.9

Growth in mobile penetration – mix of demand (%)

2016 48.2

2017

2018 58.0

55.0

Accelerating warehouse automation – online costimprovement (bpsimprovement to GTV)

2016 40

2017

2018 80

70

RationaleBasic earnings per share (EPS) divides earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the financial year.

2018 performanceUnderlying EPS* declined by 65.6% to 2.2p, after a reduction in profit after tax.


RationaleReturn on capital employed (ROCE) measures the profitability of the Company relative to the size of assets used to generate returns.

2018 performanceUnderlying ROCE declined from 11.1% to 9.4% reflecting the fall in profitability in the year.

* Lease-adjusted before exceptional items.

RationaleNet debt measures Group borrowings net of cash held at the balance sheet date, and reflects the movement in cash generated by the business after cash expenses.

2018 performanceIncluding cash outflow relating to the exceptional restructuring charges, year end net debt has increased to £321.3 million.

RationaleMobile@everywhere will be the primary form of customer interaction unifying channels and building loyalty.

2018 performanceMobile demand grew by 20%, outpacing desktop demand and accounting for 58% of digital orders.

RationaleDriving efficiency through investment in warehouse automation to improve digital profitability.

2018 performanceFulfilment cost ratios improved by 80 bps as a result of efficiencies made.

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Risk framework (based on

ISO 31000)

Risk Reporting

Risk Treatment

Risk Evaluation

Risk Identification

Set Risk Appetite

The board of Debenhams considers it important that there should be a regular and systematic approach to the management of risks in order to provide assurance that strategic and operational goals can be met and the Group’s reputation is protected.

The board has conducted a review of the effectiveness of internal controls and is satisfied that those in place remain appropriate.

An overview of the risk management process including clearly defined roles and responsibilities is outlined in the risk management framework (figure 1).

R I S K M A N A G E M E N T

Optimising our risk management processes

The boardSets strategic objectives

Agrees risk framework and risk appetite

Identifies principal risks and ensures appropriately managed

Sets delegation of authority

Approves Group policies and procedures

Executive CommitteeMonitors performance and

changes in key risks facing the business and provides regular

reports to the board

Agrees key actions to manage risks

Audit CommitteeMonitors assurance and risk management arrangements

Heads of functionManagement and employees

are responsible for the identification, evaluation, treatment and reporting

of local risks

Maintenance of individual department risk registers

Implementation of key risk mitigation plans

Effectiveness of risk and control processes

Reviews of the effectiveness of key risk management and control processes through:

– Risk Committee– Internal audit– External audit

– Whistleblowing

Risk management

Guidance and advice to Heads of Function and specialist teams to help them with the following:

Figure 1: Risk management framework

Strategic report

30


Principal risks

Economic environment

Financial, liquidity

and credit

Systems availability and cyber security

Competition for customers

Business strategy and

transformation

Supply chain and key

suppliers

Legal and regulatory

Key personnel

Property

Whistleblowing Two main routes are available to colleagues and direct supply chain workers to raise concerns over malpractices. The first encourages colleagues to talk to their line manager, their manager’s manager or the human resources team. The second route is a confidential reporting line via which colleagues can speak to the Group’s anti-fraud team. If a colleague feels that the matter is so serious that it cannot be discussed in any of these ways, they can contact the Company Secretary or the Director of Internal Audit and Risk Management. The Group policy on whistleblowing and the methods to raise issues are reviewed annually by the Audit Committee and any serious matters are raised with the chairman of the Audit Committee.

Principal risks and uncertainties The risks detailed on pages 32 to 34 are the principal risks and uncertainties that may impact the Group’s ability to achieve its strategic and operational goals. They are reviewed on, at least, an annual basis as part of the risk management process and are ranked based on overall risk to the business.

Whilst the impact of the UK’s decision to exit the European Union (EU) cannot yet be fully quantified, a number of existing risks have already been identified as sensitive to Brexit and continue to be monitored carefully, with appropriate levels of mitigating action being considered as details emerge.

It should be noted that any system of risk management and internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

Figure 2: Principal risksRisk management activitiesRisk appetiteThe Group’s risk appetite is defined by the board, and provides guidance on any requirement for additional controls, implementation timeframes and authority levels.

Risk identificationRisks are identified through a number of routes, including a regular organisation-wide review facilitated by the risk management team across each operating division on an ongoing cyclical basis. All senior managers participate in the exercise, including the executive committee.

Risk evaluationIn order to understand the impact specific risks would have on the Group, risks are evaluated based on the likelihood of occurrence and severity using a standardised scoring model, which considers the degree of change across one or more performance indicators.

Risk treatmentThe organisation-wide review captures the controls used by management to mitigate identified risks, with the risk score determining if additional treatment is required based on the Group’s risk appetite.

Risk reporting The outputs from these processes are collated into the Group’s risk register and linked together to define the principal risks faced by the Group. Performance is monitored by the board, executive committee, Audit Committee, Risk Committee, and other key governance groups. The overall risk profile is taken into consideration when setting the annual internal audit plan.

Viability assessmentThe principal risks and uncertainties identified through these risk management activities are taken into consideration as part of the directors’ assessment of ongoing viability, described in more detail on page 41.

Anti-Bribery and Corruption Debenhams is committed to conducting its business affairs so as to ensure that it does not engage in or facilitate any form of bribery or corruption in any part of its supply chain. Expected standards of behaviour are outlined in the anti-bribery policy, which also provides guidance on the giving and receiving of gifts and hospitality, and is supported by an e-learning training programme for selected roles.

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1


2

Business strategy and transformation

3

Supply chain and key suppliers

4


5

Financial, liquidity and credit

6


Risk• Inability to predict accurately or

fulfil customer preferences or demand through competitive, economic and profitable channels

• This is an increasing risk given the ongoing market conditions faced

Risk• Failure to deliver Debenhams’

redesigned strategic priorities • This is an increasing risk due to

the importance of fully delivering the strategy

Risk• Adverse events influencing either

the sustainability of the supply chain or Debenhams’ relationship with any of its major suppliers, service providers, international partners, designers, or concessionaires

• This is an increasing risk due to the potential of reduced access to credit insurance for our supply base

Risk• Continuing adverse

economic conditions

Risk• Exposure to market rates, liquidity

and credit risks have an adverse impact of the Group’s financial position or performance

• This is an increasing risk due to the recent fall in profitability and the reduction in credit insurance available for Debenhams’ suppliers

Risk• Systems failure, external attack

of systems, or data inaccuracy• Inability to continue smooth

operations following a major incident

Potential impact• Sales will be lower, market share

will be reduced and the Group may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory or may experience inventory shortfalls on popular merchandise

• Channel shifts away from stores to online could lead to higher operational costs within the online channel and lower profitability, or even impairment, of store assets

Potential impact• Could significantly delay or prevent

the achievement of Debenhams’ business plan and could have a material adverse effect on Debenhams’ business, financial condition or results of operations

Potential impact• Place pressure on margins and

profitability or require the Group to divert financial and management resources from more beneficial uses

• Additional unplanned costs required to transfer operations between providers or additional operational costs from a new provider

• Changes in exclusivity arrangements with designers or any decline in their popularity

• The loss of a number of key concession partners

Potential impact• A decline in sales on discretionary

purchases leading to a reduction in profit alongside a material adverse effect on Debenhams’ results

Potential impact• A material reduction in cash and

liquidity could affect the financial position and/or performance of the Group

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

Potential impact• Failure in the stability, integrity or

availability of information systems could adversely affect Debenhams’ business operations and results or could cause inappropriate decisions to be made using wrong, missing or ambiguous information

• Cyber attack resulting in reduced availability of Debenhams’ systems, loss of reputation and customer trust, and regulatory fines

Examples of mitigation• Making shopping confidence-

boosting, sociable and fun is at the heart of Debenhams’ strategy, which is outlined on pages 10 to 19

• In developing its strategy, the Group takes into consideration market, trend and customer research, with the customer insight team providing valuable intelligence on any changes in customer priorities

• An understanding of customers and their needs is developed by listening to their views, market intelligence and reviewing KPIs which ensures that pricing is competitive and promotional activity is appropriate

• The UK exiting the European Union may generate foreign exchange rate volatility, lead to delays at ports, or changes to trade agreements and duty rates, which could impede the organisation’s ability to compete effectively, meaning this is a risk that is carefully monitored

Examples of mitigation• Debenhams is reviewing and

updating its business change roadmap to ensure its project portfolio focuses on the five key strategic areas outlined on pages 10 to 19

• Management supplies detailed updates on progress within the transformation programme, which are closely reviewed by the board to ensure that management is focused on key priorities, cost control and benefit realisation

• The UK exiting the European Union may lead to loss of access to the free movement of goods, services, people and capital, making this a risk that is closely monitored

• The volume and complexity of change being implemented, its importance to the business plan, and our reliance on third party specialist resource to support delivery make this a risk that is monitored carefully

Examples of mitigation• Debenhams fosters close and

collaborative relationships with its suppliers. Both parties work towards the objective of optimising sustainable fulfilment and costs, which is measured regularly by management through KPIs. You can read more about how the Group builds relationships with our suppliers on page 22

• Debenhams continues to develop its supplier base to mitigate the potential of cost-price inflation without compromising the quality of its products. In addition, the sourcing division has been strengthened to include additional expertise which assists with sourcing decisions, production consolidation and lead time reduction, amongst other things

• Loss of supplier confidence impacts on quality or availability of key product

Examples of mitigation• The board conducts strategic

business reviews which ensure that management is focused on key priorities and cost control. These reviews also focus on the Group’s strategy to make shopping confidence-boosting, sociable and fun

• The continued volatility of the consumer environment make this a risk that is monitored carefully

Examples of mitigation• Committed funding lines are

regularly reviewed for headroom and refinanced significantly in advance of expiry. Current facilities expire in June 2020 and July 2021

• Regular cash and liquidity forecasting supports proactive management of cash flows to meet the Group’s obligations as they fall due

• Hedging policies are in place to manage interest and exchange rate risk to minimise the impact of any material market movements

• Further details on financial risks are included in the notes to the financial statements

Examples of mitigation• A robust systems infrastructure is

required to support the delivery of our strategic objectives which are outlined on page 7

• Information systems developments are key enablers and critical to ensure we can compete effectively, and these are monitored through a business change roadmap

• The overall governance framework has been further enhanced, and includes committees that focus on areas such as general data protection regulation and payment card industry compliance

• A business continuity policy and processes, ensure an effective framework is in place to enable the swift recovery and continuation of normal business operations, and this has been improved through the introduction of a new data centre

• This continues to be an area of high management focus given the rising levels of cybercrime globally and the increasing reliance on information assets

Strategic focus

Strategic focus

Strategic focus

Strategic focus

Strategic focus Strategic focus

P R I N C I PA L R I S K S A N D U N C E R TA I N T I E SStrategic report

32


1


2

Business strategy and transformation

3

Supply chain and key suppliers

4


5

Financial, liquidity and credit

6


Risk• Inability to predict accurately or

fulfil customer preferences or demand through competitive, economic and profitable channels


Risk• Failure to deliver Debenhams’

redesigned strategic priorities • This is an increasing risk due to

the importance of fully delivering the strategy

Risk• Adverse events influencing either

the sustainability of the supply chain or Debenhams’ relationship with any of its major suppliers, service providers, international partners, designers, or concessionaires

• This is an increasing risk due to the potential of reduced access to credit insurance for our supply base

Risk• Continuing adverse

economic conditions

Risk• Exposure to market rates, liquidity

and credit risks have an adverse impact of the Group’s financial position or performance

• This is an increasing risk due to the recent fall in profitability and the reduction in credit insurance available for Debenhams’ suppliers

Risk• Systems failure, external attack

of systems, or data inaccuracy• Inability to continue smooth

operations following a major incident

Potential impact• Sales will be lower, market share

will be reduced and the Group may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory or may experience inventory shortfalls on popular merchandise

• Channel shifts away from stores to online could lead to higher operational costs within the online channel and lower profitability, or even impairment, of store assets

Potential impact• Could significantly delay or prevent

the achievement of Debenhams’ business plan and could have a material adverse effect on Debenhams’ business, financial condition or results of operations

Potential impact• Place pressure on margins and

profitability or require the Group to divert financial and management resources from more beneficial uses

• Additional unplanned costs required to transfer operations between providers or additional operational costs from a new provider

• Changes in exclusivity arrangements with designers or any decline in their popularity

• The loss of a number of key concession partners

Potential impact• A decline in sales on discretionary

purchases leading to a reduction in profit alongside a material adverse effect on Debenhams’ results

Potential impact• A material reduction in cash and

liquidity could affect the financial position and/or performance of the Group

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

Potential impact• Failure in the stability, integrity or

availability of information systems could adversely affect Debenhams’ business operations and results or could cause inappropriate decisions to be made using wrong, missing or ambiguous information

• Cyber attack resulting in reduced availability of Debenhams’ systems, loss of reputation and customer trust, and regulatory fines

Examples of mitigation• Making shopping confidence-

boosting, sociable and fun is at the heart of Debenhams’ strategy, which is outlined on pages 10 to 19

• In developing its strategy, the Group takes into consideration market, trend and customer research, with the customer insight team providing valuable intelligence on any changes in customer priorities

• An understanding of customers and their needs is developed by listening to their views, market intelligence and reviewing KPIs which ensures that pricing is competitive and promotional activity is appropriate

• The UK exiting the European Union may generate foreign exchange rate volatility, lead to delays at ports, or changes to trade agreements and duty rates, which could impede the organisation’s ability to compete effectively, meaning this is a risk that is carefully monitored

Examples of mitigation• Debenhams is reviewing and

updating its business change roadmap to ensure its project portfolio focuses on the five key strategic areas outlined on pages 10 to 19

• Management supplies detailed updates on progress within the transformation programme, which are closely reviewed by the board to ensure that management is focused on key priorities, cost control and benefit realisation

• The UK exiting the European Union may lead to loss of access to the free movement of goods, services, people and capital, making this a risk that is closely monitored

• The volume and complexity of change being implemented, its importance to the business plan, and our reliance on third party specialist resource to support delivery make this a risk that is monitored carefully

Examples of mitigation• Debenhams fosters close and

collaborative relationships with its suppliers. Both parties work towards the objective of optimising sustainable fulfilment and costs, which is measured regularly by management through KPIs. You can read more about how the Group builds relationships with our suppliers on page 22

• Debenhams continues to develop its supplier base to mitigate the potential of cost-price inflation without compromising the quality of its products. In addition, the sourcing division has been strengthened to include additional expertise which assists with sourcing decisions, production consolidation and lead time reduction, amongst other things

• Loss of supplier confidence impacts on quality or availability of key product

Examples of mitigation• The board conducts strategic

business reviews which ensure that management is focused on key priorities and cost control. These reviews also focus on the Group’s strategy to make shopping confidence-boosting, sociable and fun

• The continued volatility of the consumer environment make this a risk that is monitored carefully

Examples of mitigation• Committed funding lines are

regularly reviewed for headroom and refinanced significantly in advance of expiry. Current facilities expire in June 2020 and July 2021

• Regular cash and liquidity forecasting supports proactive management of cash flows to meet the Group’s obligations as they fall due

• Hedging policies are in place to manage interest and exchange rate risk to minimise the impact of any material market movements

• Further details on financial risks are included in the notes to the financial statements

Examples of mitigation• A robust systems infrastructure is

required to support the delivery of our strategic objectives which are outlined on page 7

• Information systems developments are key enablers and critical to ensure we can compete effectively, and these are monitored through a business change roadmap

• The overall governance framework has been further enhanced, and includes committees that focus on areas such as general data protection regulation and payment card industry compliance

• A business continuity policy and processes, ensure an effective framework is in place to enable the swift recovery and continuation of normal business operations, and this has been improved through the introduction of a new data centre

• This continues to be an area of high management focus given the rising levels of cybercrime globally and the increasing reliance on information assets

Strategic focus

Strategic focus

Strategic focus

Strategic focus

Strategic focus Strategic focus

Key

Destination Digital Different Underpinned by Simplify & Focus

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P R I N C I PA L R I S K S A N D U N C E R TA I N T I E SC O N T I N U E D

7

Property 8

Legal and regulatory

9

Key personnel

Risk• An adverse impact on performance

from property-related events, such as store closures, business rates or rental increases

• This is an increasing risk due the potential for additional store closures, and associated costs of exit, following the comprehensive review of the UK portfolio

Risk• Events that negatively impact the

reputation of, or value associated with, Debenhams’ brand

Risk• Loss of key management or

other personnel Debenhams depends upon


Potential impact• Significant alterations in rental

terms could have a material adverse effect on the business

• Disputes over store modernisations may lead to reinstatement costs and termination of leases may lead to unexpected dilapidation costs being incurred

Potential impact• Loss of stakeholder trust and

confidence, including an adverse effect on Debenhams’ ability to attract and retain third party brands, suppliers, designers, concessions and franchisees

• Material adverse effect on Debenhams’ business, financial condition or profitability

Potential impact• Significantly delay or prevent

the achievement of Debenhams’ business plan

• Material adverse effect on Debenhams’ business, financial condition or results of operations

Examples of mitigation• Debenhams has a specialist

property team which manages all aspects of leasehold property, including cost renegotiations, communication of the store modernisation programme, lease renewals and adherence to all legal obligations under the lease

Examples of mitigation• Forums exist to focus on specific

areas of legislation, with business policies and procedures in place to ensure roles and responsibilities are understood across the Group

• Debenhams has specialist teams in place to monitor changes to legislation and standards, further supported by membership of key industry bodies to enhance awareness

• All suppliers are expected to adhere to Debenhams’ own supplier code of conduct, which is underpinned by Debenhams’ robust policy on compliance that includes a focus on social and ethical standards

• The uncertainty around the likely changes to UK legislation following the UK decision to exit the European Union mean this is a risk which is being monitored closely

Examples of mitigation• In order to attract and retain talent,

both succession and personal development plans are in place throughout the Group. In addition, target-led, performance-related incentive schemes exist

• The UK decision to exit the European Union could impact on the availability of talent in the job market and the eligibility for individuals to work in certain jurisdictions, making this a risk that is monitored carefully

Strategic focus

Strategic focus

Strategic focus

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34


F I N A N C I A L R E V I E W

Rigorous cost and capital discipline

Rachel OsborneChief Financial Officer

SEGMENTAL PERFORMANCEUKGross 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 UK growth in food categories over last year of c10%. In addition our UK digital growth of 10.0% 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.

InternationalIn 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 openings) as we continue to optimise the number of partners, and close 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.

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Financial summary

£m

52 weeks to1 September

2018

52 weeks to2 September

2017 % change

Gross transaction value1,2

UK 2,287.3 2,350.0 (2.7)%

International 613.1 604.1 1.5%

Group 2,900.4 2,954.1 (1.8)%

Statutory revenue1,2

UK 1,832.7 1,892.9 (3.2)%


Group 2,277.0 2,335.0 (2.5)%

Group like-for-like sales movement3 (2.3)%

Group gross margin movement4 (140 bps)

EBITDA1,5,6

UK 112.0 174.0 (35.6)%


Group 157.3 217.0 (27.5)%

Operating profit1,6

UK 8.5 74.0 (88.5)%


Group 43.4 107.5 (59.6)%

Underlying profit before tax6 33.2 95.2 (65.1)%

Cash exceptional items6 (12.3) (8.5)

Non-cash exceptional items6 (512.4) (27.7)

Reported (loss)/profit before tax (491.5) 59.0

Underlying earnings per share6 2.2p 6.4p

Basic (losses)/earnings per share (37.5)p 4.0p

Dividend per share 0.500p 3.425p

1 September 2018

2 September 2017

Net debt (£m) 321.3 275.9

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.

F I N A N C I A L R E V I E WC O N T I N U E D

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GROUP SALES AND PROFITSSales and revenueGroup 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 Group 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:

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 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 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 positions as we transition between seasons. This has resulted in a gross margin rate reduction of 140 bps year on year.

Operating costs before depreciation 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 saving 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 costsNet 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 “Employee benefits” (FY2017: £nil).

Exceptional itemsDuring FY2017, 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 and change in the 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 (FY2017: £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:

£mCash in

year Non cash Total

Strategic review & restructuring 3.1 10.5 13.6

Warehouse restructure 9.2 1.8 11.0

Store impairment & onerous leases – 117.5 117.5

Goodwill impairment – 302.1 302.1

Asset write-offs – 80.5 80.5

Total exceptional costs 12.3 512.4 524.7

a) Strategic review and restructuringExceptional 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 restructureDuring 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.

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c) Non cash impairment, onerous lease chargesAs 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 privatised 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 non-cash impairment charge to goodwill has been made of £302.1 million (FY2017: £nil).

d) IT systems write-offAs 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 £80.5 million.

Profit before taxProfit 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 in FY2018.

TaxationTaxation 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 taxProfit 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 associateOn 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 shareUnderlying 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.

DividendsAn 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 net debt (FY2017: 2.400 pence).

CASH FLOW, USES OF CASH AND MOVEMENT IN NET DEBTDebenhams 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.

£m

52 weeks to 1 September

2018

52 weeks to 2 September

2017

Operating profit before exceptional costs 43.4 107.5

Depreciation, amortisation and loss on disposal 113.9 109.5

Working capital 1.8 (0.7)

Cash Inflow from Operations 159.1 216.3

Taxation 1.3 (16.3)

Financing (11.0) (11.1)

Non-discretionary capital spend (31.5) (29.0)

Free Cash Flow 117.9 159.9

Development capital spend (112.0) (95.8)

Dividends (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 275.9 279.0

Closing net debt 321.3 275.9

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Capital expenditureTotal 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 net debt.

BALANCE SHEET

£m1 September

20182 September

2017

Intangible assets (inc. goodwill) 619.4 991.9

Property, plant and equipment 603.7 654.9

Inventory 396.0 374.1

Other assets 123.5 108.7

Trade and other payables (615.6) (579.6)

Other liabilities (447.1) (398.7)

Retirement benefit surplus 159.4 80.9

Net deferred tax liabilities (28.6) (38.7)

Net debt (321.3) (275.9)

Reported net assets 489.4 917.6

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

Property, plant and equipmentThe year end balance of £603.7 million (£654.9 million FY2017) has been reduced by an exceptional store impairment charge of £55.8 million.

InventoryStock levels increased by 5.9% to £396.0 million, primarily due to the two new stores and early intake of autumn/winter stock in order to improve availability for the new season. FY2017 stock and trade creditor balances have been restated to include owned stock in transit yet to reach the UK, which was previously excluded from the stock numbers; the corresponding entry being made in trade creditors. This has no overall impact on the profits, working capital or cash flows of the Group. Refer to note 2 to the financial statements for further details.

Terminal stock levels reduced to 2.7% from 2.8% in FY2017, and remain in line with our historical range of 2.5% to 3.5%.

Net debtThe 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.

PensionsThe 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 due to both the continued success of the returns being made on the assets and 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.

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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 UNCERTAINTIESWhilst 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 CONCERNThe 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 eight 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, 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 it could continue to adopt the going concern basis in preparing the financial statements.

Rachel Osborne Chief Financial Officer 25 October 2018

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V I A B I L I T Y S TAT E M E N T

The aim of the Viability Statement is for the directors to assess the prospects of Debenhams to meet its liabilities, taking into account its current position and principal risks.

Debenhams has developed an annual three year strategic plan, which considers the Group’s cash flows and other financial key performance indicators over this period. The three year strategic plan takes into consideration sensitivities that encompass a wide spectrum of potential outcomes including changes in like-for-like sales, margin rate, costs, capital expenditure forecasts and working capital movements.

These scenarios are designed to explore the resilience of Debenhams to the potential impact of the Principal risks set out on pages 32 to 34, or a combination of those risks. The directors paid particular attention to the following principal risks:

• Competition for customers• Financial, Liquidity and Credit• Economic environment; and• Business strategy & transformation

The three year strategic plan is reviewed each year by the directors. Once approved by the board, the plan is cascaded across the business and provides the basis for setting strategic priorities and detailed budgets that are subsequently used by the board to monitor and evaluate performance.

The directors have assessed the viability of Debenhams over the three year period to 28 August 2021. This period has been selected because it reflects the pace of change in retail; uncertainty surrounding the UK’s decision to exit the European Union; aligns with the Group’s plans under its Debenhams Redesigned strategy and its three year planning process; and presents the board and the readers of the annual report with a reasonable degree of confidence whilst still providing an appropriate longer-term outlook.

The board is in agreement that Debenhams is a viable business and the viability statement can be found in the directors’ report on page 78.

In making this statement the directors have considered the resilience of Debenhams, taking account of its current position and historical financial performance, the principal risks facing the business in severe but theoretical scenarios, and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period. In assessing these impacts, the directors also considered specific supplier risks in relation to credit insurance and the potential impact that working capital may be impacted by such risks.

As noted in note 22 of the financial statements on page 121, the Group’s revolving credit facility is due to expire in June 2020 and its issued senior notes expire in July 2021. While recognizing the challenging retail environment will increase the risks and costs around the future refinance of these facilities, based on current market conditions the directors believe Debenhams has the appropriate plans and mitigations in place to maximize the prospects of a successful refinance of these facilities in advance of the 2020 and 2021 expiries.

The financial position of the Group, including information on cash flow, can be found in the financial review section on pages 35 to 40.

In addition, the financial statements include notes on finance costs page 111 and financial risk management including treasury policies on interest rate, liquidity, currency and credit risk pages 122 to 127.

STRATEGIC REPORTThe strategic report was approved by a duly authorised committee of the board of directors on 24 October 2018 and signed on its behalf by:

Sergio Bucher Chief Executive Officer 25 October 2018

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