Debenhams plc
Annual Report and Accounts 2012
A leading
international,
multi-channel brand
Business model
Understanding Debenhams
Debenhams is a leading international, multi-channel brand which is available
in 92 countries through stores or online. We put our customers at the heart
of everything we do and are truly passionate about the products that we sell,
half of which are exclusive to Debenhams.
How we buy
What we sell
A diverse supply chain
Our sourcing strategy is based on “right product, right country.”
We have been direct sourcing for many years, resulting in
long-standing relationships with suppliers around the world.
China/Hong Kong remains our largest sourcing hub whilst
other countries like Bangladesh are growing. At all times we
need to meet our customers’ expectations that every one of
our products is manufactured in a factory which is socially
ethical and quality assurance compliant.
A unique, diff erentiated and exclusive product off er
Delivering a compelling customer proposition is a key part of
our strategy. Our off er is unique through a combination of own
brands, international and concession brands. It is exclusive
through core and designer own brands which account for
almost half of everything that we sell. It is diff erentiated
through Designers at Debenhams, a portfolio of diff usion
brands from some of the UK’s top fashion designers. We also
give our customers the wide choice of product categories that
they expect from a department store.
Country sourcing
Direct vs indirect sourcing
Unique mix of brands
Wide choice of product categories
Country
China/Hong Kong
India
Bangladesh
Vietnam
Romania
Turkey
Pakistan
Cambodia
UK
Sri Lanka
Morocco
Egypt
Rest of world
Direct
Indirect
%
50
12
9
5
5
4
3
2
2
2
1
1
4
%
65
35
Sales by brand
Own bought core brands
Own bought designers brands
Own bought international
brands
Concessions/consignment
%
28.9
17.2
30.6
23.3
Own bought sales by category
Womenswear
Menswear
Childrenswear
Lingerie
Accessories
Health & beauty
Home & furniture
Sports & leisure
Food services
Other
%
17.6
13.8
9.9
6.3
14.0
22.8
11.5
0.5
3.4
0.2
65%Direct sourcing in 2012
76.7%2012 Own bought sales mix
Read more about trends in sustainable sourcing
in the Sustainability Review on page 48.
Read more about “Delivering a compelling
customer proposition” on page 20.
How we sell
Who we sell to
Giving customers around the world more ways to shop
The Debenhams brand trades through 239 stores in 28
countries and is available online in 67 countries. Customers
can also shop through smartphones, tablet computers and
other mobile devices as well as more traditional sales channels
such as catalogues and by telephone. Our fl exible approach
means that we can tailor our product range to meet the
demands of a particular local market or channel.
A family department store with something for everyone
Debenhams is a family department store that operates
at the heart of the communities in which we are present.
Our customer base refl ects our family orientation. In 2012 we
gained market share in key categories including womenswear,
menswear, premium health & beauty and home & furniture.
Over the past year we have focused communications with
our customers on the “Life Made Fabulous” theme.
Store numbers
Gross transaction value by segment
Frequency of visit
UK
International – Ireland
International – Denmark
International – franchises
No
154
11
6
68
UK
International
£m
2,204.6
503.4
Sales by channel
Sales by channel trend
Daily
2-3 times a week
Once a week
Once a fortnight
Once a month
Every couple of months
Less often
%
2
8
21
17
23
17
12
95.9%
93.2%
90.7%
4.1%
6.8%
9.3%
2010
2011
2012
Instore
Online
Channel
Instore (UK and
international)
Online (UK and
international)
£m
%
2,457.4
90.7
250.6
9.3
239Stores trading the Debenhams brand
Read more about how we are “Focusing on
UK retail”, “Increasing availability and choice
through multi-channel” and “Expanding the
brand internationally” on pages 16 to 19,
pages 24 to 27 and pages 28 to 31.
Market share by age
Market share gains in 2012
Under 20
20-24 years
25-34 years
35-44 years
45-54 years
55-64 years
65+
Source: Kantar Worldpanel Fashion
market share data 24 weeks to
2 September 2012
%
2.4
3.5
5.5
5.8
5.7
6.3
5.2
Total clothing
Womenswear
Menswear
Childrenswear
Health & beauty
Home & furniture
Source: Kantar, NPD, GfK
42Average age of Debenhams customer
Read more about how we communicate with
our customers through our marketing activities
on page 22.
Highlights
Gross transaction value *
£2.7bn
Revenue*
£2.2bn
Profi t before tax*
£158.3m
Basic earnings per share *
9.8p
Dividend per share**
3.3p
+2.6%
+2.5%
+4.2%
+14.0%
+10.0%
*52 weeks to 1 September 2012 vs 52 weeks to 27 August 2011
**52 weeks to 1 September 2012 vs 53 weeks to 3 September 2011
Contents
Overview
4 Chairman’s letter
6
8 Market overview
2012 performance KPIs
Strategy review
12 Chief Executive’s review
16 Focusing on UK retail
20 Delivering a compelling customer proposition
Increasing availability and choice through
24
multi-channel
28 Expanding the brand internationally
Finance and risk review
34 Chief Financial Offi cer’s review
39 Risk review
Sustainability
48 Sustainability review
Governance
55 Chairman’s introduction to governance
56 Board of directors
58 Corporate governance report
63 Directors’ report
66 Remuneration report
Accounts
75 Statement of directors’ responsibilities
76
Independent auditors’ report to the members
of Debenhams plc (Group)
77 Consolidated income statement
78 Consolidated statement of comprehensive income
79 Consolidated balance sheet
80 Consolidated statement of changes in equity
81 Consolidated cash fl ow statement
82 Notes to the fi nancial statements
119 Five year record income statements
120 Five year record balance sheets
121
Independent auditors’ report to the
members of Debenhams plc (Company)
122 Company balance sheet
123 Notes to the Company fi nancial statements
Other information
129 Store list
130 Glossary
131 Shareholder information
Note:
The 2012 fi nancial year comprised 52 weeks to 1 September 2012 whereas the 2011 fi nancial
year comprised 53 weeks to 3 September 2011. The board believes that in order to have a proper
understanding of the performance of the business, in many cases it is more appropriate to
compare the 52 weeks of the 2012 fi nancial year with the fi rst 52 weeks of the 2011 fi nancial
year (the 52 weeks to 27 August 2011). The basis on which comparisons are made is clearly
stated throughout this Annual Report and Accounts. Further details are set out in the Chief
Financial Offi cer’s review on pages 34 to 38.
To view our online report visit:
ar12.debenhamsplc.com
Debenhams plc Annual Report and Accounts 2012 1
Overview
Over the next few pages we look
at how Debenhams performed in
2012 and put our performance into
context with an overview of the
UK high street market.
Chairman’s letter p4
Key performance indicators p6
Market overview p8
For more information go to
ar12.debenhamsplc.com
2 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Debenhams plc Annual Report and Accounts 2012 3
Chairman’s letter
Resilient performance in challenging markets
Nigel Northridge, Chairman
2012 was a year of celebration across the
UK for many reasons, not least the Queen’s
Diamond Jubilee and the hosting of
enormously successful Olympic and
Paralympic Games. For retailers, however, it
was one of the most challenging years on record.
4 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
We are aware that capital allocation is a subject
at the forefront of many shareholders’ minds.
The fi rst priority for the use of capital in
Debenhams is to invest in the strategy that
Michael laid out in October 2011.
Debenhams’ Corporate Governance Report
can be found on pages 58 to 62 of this Annual
Report and the Remuneration Report on
pages 66 to 74.
During the year, there were a number
of changes to the board. Having joined
Debenhams at the beginning of November
2011, Simon Herrick was appointed Chief
Financial Offi cer at the Annual General
Meeting in January 2012, replacing Chris
Woodhouse who resigned from the board
on that day. Adam Crozier stepped down
from the board at the end of the fi nancial
year, having served as a non-executive
director for more than six years. We thank
Chris and Adam for their commitment to
the business. Following Adam’s resignation,
Dennis Millard assumed chairmanship of
the Remuneration Committee and Mark
Rolfe succeeded Dennis as chairman of the
Audit Committee.
In October 2012 we announced the
appointment of Peter Fitzgerald to the
board as a non-executive director. Peter
has extensive experience in helping retail
businesses to succeed online with market
leaders Amazon and Google. We look
forward to his contribution.
To succeed as we have done in such a
diffi cult year has only been achieved through
the dedication and hard work of the many
thousands of people who work for
Debenhams, in our stores, our head offi ce
locations, our international offi ces and our
logistics and print operations. We do not take
their support and enthusiasm for our
business for granted. The board thanks each
of them for the tremendous eff ort they made
in 2012 and looks forward to another
successful year in 2013.
Nigel Northridge
Chairman
Dear shareholder
2012 was a year of celebration across
the UK for many reasons, not least the
Queen’s Diamond Jubilee and the hosting
of enormously successful Olympic and
Paralympic Games. For retailers, however,
it was one of the most challenging years
on record.
A warm autumn/winter season was followed
by a wet spring/summer season which
depressed consumer demand in an already
fragile environment. Despite this, I am
delighted to tell you that Debenhams not
only weathered these diffi cult conditions but
came out in good shape. Our like-for-like sales
performance during the year was by far the
strongest for a number of years and we
delivered our fourth successive year of
profi t before tax growth*.
This was Debenhams’ fi rst year under
Michael Sharp’s leadership. As a vastly
experienced retailer with an unparalleled
knowledge of and passion for Debenhams,
the board was confi dent in Michael’s ability
to develop and execute a successful strategy
that would write the next chapter in
Debenhams’ history. This has undoubtedly
been the case. The strategy to create a leading
multi-channel, international brand is centred
around the four pillars, about which you can
read more on pages 16 to 31. Our stakeholders
– including our customers, employees,
suppliers and of course shareholders – have
responded well to this clear articulation of
strategy and consistent delivery against it
and we believe that our performance in 2012
is clear evidence that the strategy is working.
We are aware that capital allocation is a
subject at the forefront of many shareholders’
minds. The fi rst priority for the use of capital
in Debenhams is to invest in the strategy that
Michael laid out in October 2011. Having
reinstated the dividend in April 2011, we
announced in October 2011 that we would
commence a long-term share buyback
programme in the second half of the year.
This decision was based on the board’s belief
that there is little benefi t to the business of
sustaining leverage below one times net debt
to EBITDA and that a share buyback
programme is the most fl exible method to
return cash to shareholders. The buyback
started in April 2012 and by the end of the
fi nancial year we had completed the initial
tranche of £20 million. The programme will
continue in the 2013 fi nancial year.
*52 weeks to 1 September 2012 vs 52 weeks to 27 August 2011
Debenhams plc Annual Report and Accounts 2012 5
2012 performance
Key performance indicators
Group fi nancial KPIs
All comparisons for 2011 are for
the 52 weeks to 27 August 2011
unless otherwise stated.
6 Debenhams plc Annual Report and Accounts 2012
Gross transaction value
Gross transaction value (GTV) is a
measure of overall sales in the business
and includes sales from own bought
brands and concession brands. The board
believes that GTV is a good guide to the
overall level of activity in the Group.
2012 performance
Debenhams reported an increase in
GTV of 2.6% in 2012. This was driven
by like-for-like sales growth in stores
and online in the UK and international
businesses as well as new store space.
Like-for-like sales
Like-for-like sales measures the annual
sales performance of stores that have
been open for one year or more. The board
therefore views it as a useful indication of
organic sales growth across the business.
2012 performance
Like-for-like sales increased by 1.6% in
2012, the fi rst time it has grown in the past
fi ve years. This was a good performance
given the diffi cult market conditions that
prevailed throughout the year. Further
details on the drivers of like-for-like sales
growth can be found on pages 36.
KPI
Gross transaction value
2008
2009
2010
2011
2012
£2,336m
£2,340m
£2,564m
£2,640m
£2,708m
KPI
Like-for-like sales
-3.6%
-0.9% 2008
2009
2010 flat
-0.3%
2011
2012 +1.6%
Further information
• Finance review p35
Further information
• Finance review p35
Profi t before tax
Profi t before tax is the board’s principal
measure of profi tability. The use of
headline profi t before tax has now been
discontinued as explained in the fi nance
review on page 35.
2012 performance
Profi t before tax grew by 4.2% in 2012
versus the prior year. The main drivers
of growth were higher sales and
a smaller interest charge as a result
of reduced net debt and lower funding
costs following refi nancing of the
bank facilities in July 2011.
Net debt
Net debt is the KPI used by the board to
measure balance sheet strength. It is vital
that the Company has the right capital
structure to support its strategic objectives.
2012 performance
Net debt continued to fall in 2012,
ending the year £15 million lower than
last year despite higher capex, payment
of both the 2011 fi nal dividend and 2012
interim dividend and the £20 million
initial tranche of the long-term share
buyback programme.
KPI
Profit before tax*
2008
2009
2010
2011
2012
£105.9m
£120.8m
£145.3m
£151.9m
£158.3m
*All numbers are before exceptionals
Further information
• Finance review p35
KPI
Net debt
2008
2009
2010
£994m
£590m
£517m
2011
£384m
2012 £369m
Further information
• Finance review p37
Strategic KPIs
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Delivering a compelling
customer proposition
– own bought sales mix
A key part of Debenhams’ unique,
diff erentiated and exclusive customer
proposition is the high percentage of sales
generated by own bought brands.
2012 performance
Group own bought sales mix was 76.7%
in 2012, down slightly from 77.1% last year
largely due to a better performance from
some concession brands, the addition
of new concessions in modernised UK
stores and concession expansion online.
Focusing on UK retail
– number of UK stores
Opening new stores in the UK will
continue to be a driver of sales growth
as detailed on page 18. Debenhams
generates a strong return on investment
on new stores, averaging c.40% for
the 35 stores opened since 2007.
2012 performance
Two new stores were opened during
2012. The UK store portfolio comprised
154 stores at year end. The contracted
store pipeline at the end of the year
stood at 18 stores scheduled to open
over the next fi ve years. The fi rst of these,
Chesterfi eld, opened in September 2012.
KPI
UK stores
2008
2009
2010
2011
2012
KPI
Own bought sales mix
2008
2009
2010
2011
2012
72.3%
76.5%
77.4%
77.1%
76.7%
138
143
149
152
154
Further information
• Strategy review p18
Further information
• Strategy review p22
Increasing availability and
choice through multi-channel
– online sales
Online sales are a good indicator of the
performance of Debenhams’ multi-
channel business. You can read more
about the developments in this fast
growing area on page 26.
2012 performance
2012 was another year of strong growth
in online sales. Group sales increased by
39.8%, driven by increased choice of
products, brands and ways to shop and
a 54% increase in the number of visits
to debenhams.com. The medium-term
sales target for online is £600 million.
Expanding the brand
internationally – number
of international stores
Debenhams’ international activities
comprise stores that we own in Denmark
and the Republic of Ireland, the franchise
stores and international online.
2012 performance
The number of international stores
increased by four in 2012 due to franchise
store openings. At the end of the year, the
Debenhams brand traded from 85 stores
in 27 countries: six in Denmark, 11 in the
Republic of Ireland and 68 franchise
stores in 25 countries.
KPI
Online sales
2008
£42.1m
2009
£55.1m
2010
£104.1m
2011
2012
£179.2m
£250.6m
KPI
International stores
2008
52
2009
2010
2011
2012
63
77
81
85
All comparisons for 2011 are for
the 52 weeks to 27 August 2011
unless otherwise stated.
Further information
• Strategy review p26
Further information
• Strategy review p30
Debenhams plc Annual Report and Accounts 2012 7
Market overview
Putting our performance in context
Market conditions in 2012
Market conditions remained challenging
throughout 2012. Macroeconomic factors
were compounded by unseasonal weather
throughout the year with a warm, dry
autumn followed by a cold, wet spring
and summer. The summer of 2012 saw an
unprecedented number of special events
including the Queen’s Diamond Jubilee
and the Olympic and Paralympic Games.
Consumer confi dence
Consumer confi dence in the UK remained in
negative territory throughout 2012 (fi gure 1),
causing Nick Moon, Managing Director
of GfK Social Research, to comment that
“confi dence has never been so low for so long,
even during the dark days of the 2008-2009
recession.” The widely reported “feel good
factor” from the various events that took
place during the summer did not translate
into discernible improvements in consumer
confi dence data.
High street sales
High street sales showed a fair degree
of volatility in 2012, as measured by the
BRC-KPMG Retail Sales Monitor (fi gure 2).
The year-on-year percentage change
in like-for-like sales declined in the
unseasonably warm autumn months of
October and November 2011 but recovered
in December as peak trading fi nally got
underway. April saw a sharp drop, although
this is only to be expected given the very
strong performance associated with the
Royal Wedding in that month last year.
June showed some growth, possibly driven
by the long Diamond Jubilee weekend but
the Olympic and Paralympic Games in July
and August do not appear to have driven
like-for-like sales growth on UK high streets.
Input costs
After a volatile year in 2011, input costs were
far more stable in 2012. As can be seen in
fi gure 3, cotton prices fell signifi cantly from
their 2010/11 highs leading to lower cotton
fabric prices during the course of the year.
Other fabric costs such as viscose, polyester
and wool have also fallen. There is still
pressure on input costs, however, from rising
labour rates. The Chinese government’s fi ve
year plan will increase minimum wages by
13% per annum. Labour costs are also rising
in other countries, particularly Bangladesh.
Freight rates have remained broadly fl at with
some shipping lines reducing tonnage due
to falling demand. Sterling has appreciated
against the main sourcing currencies
including the Chinese yuan, US dollar
and Indian rupee.
UK clothing market
The total market for clothing, footwear and
accessories grew in 2012. In the 24 weeks
to 2 September 2012, it increased by 0.3%.
This was largely a result of increases in
average prices which off set a decline in
volume as shown in fi gure 4. Amongst
the major product categories, the size of
the womenswear market declined whilst
menswear and childrenswear both grew.
Market metrics
Figure 1
UK consumer confidence
0
-5
-10
-15
-20
-25
-30
-35
Figure 3
Monthly average cotton prices (US cents per pound)
150
100
50
0
Sep 11 Oct Nov Dec
Jan
Feb Mar Apr May
Jun
Jul Aug 12
Sep 11 Oct Nov Dec
Jan
Feb Mar Apr May
Jun
Jul Aug 12
(Source: GfK Consumer Confidence Index Score)
(Source: National Cotton Council of America "A" Index)
Figure 2
UK high street sales (% change year-on-year)
Figure 4
UK clothing market overview
5.0
2.5
0
-2.5
-5.0
Total clothing/footwear/accessory units sold
Total clothing/footwear/accessories average price
Total market for clothing/footwear/accessories
%
-3.0
3.3
0.3
Sep 11 Oct Nov Dec
Jan
Feb Mar Apr May
Jun
Jul Aug 12
(Source: Kantar Worldpanel fashion market share 24 weeks to 2 September 2012 vs 2011)
LFL Sales % change vs LY
Total sales % change vs LY
(Source: BRC-KPMG Retail Sales Monitor)
8 Debenhams plc Annual Report and Accounts 2012
An independent view of the UK retail market in 2013
from Verdict
“ We at Verdict expect 2013 to be yet another tough year for
UK retail. Despite talk of green shoots, the economy still
faces a long, slow haul to recovery. Further public sector job
cuts will keep unemployment levels high and there will
be a time lag before the private sector can absorb this
capacity. Continuing infl ation in household expenditure,
low wage rises and consumers building up their savings
and paying off debts will restrict consumer spending for
yet another year.
Furthermore, retail in the UK is a mature sector and was
already facing saturation. The recession has simply
expedited the demise of weaker retailers, especially those
with propositions based on low margins and high volumes
and underpinned by large amounts of debt.
Austerity has settled in; consumers are buying less and
considering purchases more. Price has increased in
importance in their buying decisions – but so has quality.
They are more demanding and social media has given
consumers the power to infl uence demand and businesses’
reputations instantaneously.
The outcome is that retailers have to reassess the basics of
retailing. First, getting the product and price equation right is
essential. Having a unique product reduces price comparisons
and drives footfall to your stores and website. This demands
frequent and innovative design and product development.
Secondly, managing costs in both retail operations and the
supply chain is crucial. As global demand rises, there are
fewer low-cost countries to source from and the rising cost of
transport and long delivery times negate any manufacturing
price advantages. Buyers and merchandisers need to work
closely with manufacturers and suppliers and have a real
understanding of the true costs of the whole supply chain.
They must have the fl exibility to exploit sales opportunities
and control margin risks. This demands a high level of
professionalism and the appropriate skills.
Thirdly is distribution. No longer can retailers depend on
opening new space to drive sales, as the associated costs of
maintaining physical stores can negate profi tability. Retailers
must develop an optimum model for both physical and
online stores, with the two working seamlessly together to
give consumers what they want, when and how they want it.
And fi nally is marketing. Communicating the value of
the brand, its relevance and benefi ts are vital in keeping
a retailer top of mind when consumers fi nally decide to
spend. Customer loyalty will be vital in the new landscape
of austerity.”
About Verdict Research
With over 25 years’ experience, Verdict Research is the leading
authority on UK and European retail markets, publishing
unrivalled independent analysis.
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Our conclusions
Debenhams performed well in 2012 in a
market that was challenging on many levels.
Like-for-like sales growth of 1.6% for the year
clearly outperformed both the UK high street
and clothing sector. We achieved this
through meeting our customers’ needs,
especially when footfall was at its highest
around key events as well as month ends.
We began to see the benefi t of lower
commodity prices in the fi nal months of
the year although infl ation in other areas
of the supply chain, especially labour costs,
will require careful management.
We agree with the sentiments expressed
in Verdict’s outlook for the UK retail market
in 2013 and there are clear correlations
between these trends and the four pillars
of Debenhams’ strategy. Our unique,
diff erentiated and exclusive customer
proposition helps us to get the price/
product equation right. Our buying and
merchandising and supply chain teams
who have many years of experience of
direct sourcing and have developed
long-standing relationships with many of
our suppliers will help us to manage input
costs. The development of a true customer-
focused multi-channel model which focuses
on improving choice, availability, convenience
and service for customers will help to
optimise all sales channels, whether store
based or otherwise. Finally we are investing
more in communicating our proposition
and have a proven record of driving sales
and improving the perceptions of the
Debenhams’ brand through this investment.
Debenhams plc Annual Report and Accounts 2012 9
Strategy
review
Over the next few pages we outline our
growth strategy and what we have been
doing to deliver against this strategy.
Chief Executive’s review p12
The four pillars of our strategy
Focusing on UK retail p16
Delivering a compelling customer
proposition p20
Increasing availability and choice
through multi-channel p24
Expanding the brand
internationally p28
For more information go to
ar12.debenhamsplc.com
10 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Debenhams plc Annual Report and Accounts 2012 11
Chief Executive’s review
Delivering a clear and consistent strategy
Michael Sharp, Chief Executive
My fi rst year as Chief Executive of
Debenhams has been both hugely
rewarding and hugely challenging.
12 Debenhams plc Annual Report and Accounts 2012
My fi rst year as Chief Executive of Debenhams
has been both hugely rewarding and hugely
challenging. We made signifi cant progress
in many areas of the business whilst at the
same time facing what could be seen as a
“perfect storm.” Consumer confi dence was
already fragile before the warm autumn/
winter and wet spring/summer seasons
dented demand further. The summer saw
an unprecedented number of special events
including the Queen’s Diamond Jubilee
and the London Olympics and Paralympics
which threatened to change consumer
behaviour. At Debenhams, we focused
on controlling factors that were within
our power, taking a fl exible and pragmatic
attitude towards trading in light of the market
conditions. I believe this was a successful
approach as the results for the fi nancial
year demonstrate.
A clear and consistent strategy
Throughout 2012 we focused on the
relentless implementation of the four pillars
of the strategy that I set out in October 2011
to build a leading international, multi-
channel brand. As I said in last year’s Annual
Report, almost every major retailer has
the same ambition so why do I believe
Debenhams can succeed? We already have a
strong brand equity. We have a broad base of
customers in terms of age and demographics.
We have a unique and diff erentiated product
off er which gives our customers a market-
leading choice of brands and products.
We give our customers lots of diff erent ways
to shop through many diff erent channels.
We already have a wide international reach.
By the end of 2012 the Debenhams brand
traded from 239 stores in 28 countries
and was available online in 67 countries.
You can read about the progress we made
in 2012 and future drivers for growth in
each of the four pillars on pages 16 to 31.
The right team to deliver
One of my priorities during my fi rst year was
to ensure we have the right team with the
capability and capacity to deliver the strategy.
I fi rmly believe we have the best group of
retailers in the UK today.
I made a number of changes to the senior
management team during 2012 and at the
same time redefi ned some of the key roles
to improve clarity, align them more fully
with our strategy and allow for faster
implementation of best practice across
the business.
We welcomed Simon Herrick to Debenhams
in November 2011 and he subsequently
took up the role of Chief Financial Offi cer
in January 2012. As well as his fi nance
role, Simon heads our systems and
logistics activities.
Mike Goring joined us as Retail Director in
January 2012. Mike’s role brings together for
the fi rst time the operation of all Debenhams
stores, whether owned or franchised, UK or
international, and store development. As
such, Mike’s responsibilities are aligned to
the fi rst and fourth pillars of the strategy,
“Focusing on UK retail” and “Expanding
the brand internationally.”
Group Trading Director Suzanne Harlow,
who has been with Debenhams since 1994,
leads our buying and merchandising
activities which are crucial to any business
with an extensive own brand programme.
Suzanne is responsible for the development
of the brand and product strategy that
underpins the second pillar “Delivering a
compelling customer proposition.” During
the past year Suzanne has also assumed
responsibility for the sourcing and supply
chain functions.
Richard Cristofoli joined Debenhams as
Marketing Director in 2011, the fi rst senior
marketing appointment to the executive
committee. Richard has been instrumental in
the changes we have made to communicating
the proposition, another key tenet of the
second pillar of our strategy.
Nikki Zamblera has been HR Director since
2004. In a business that employs 30,000
people, attracting, retaining and rewarding
our people is of paramount importance. We
have recently launched the fi rst employee
climate survey.
It is not just the senior team which has been
strengthened. We are investing in people
across the business, including the teams
in buying and merchandising, marketing,
customer analytics, systems and logistics.
Highlights of the year
Overall I was very pleased with our
performance which I believe is evidence that
the strategy is starting to work. In particular
I was delighted with our like-for-like sales
performance. At 1.6%, this was by far the
strongest like-for-like sales since Debenhams
became a public company in 2006. Top line
growth has been the missing part of our story
in recent years. We delivered this by focusing
on what customers wanted when they
wanted it. We played into key calendar events
– not just Christmas but also Valentine’s Day,
Easter, Mother’s Day and the Diamond
Jubilee – when footfall was at its highest.
The store modernisation programme
also contributed sales growth. Eighteen
modernisations were completed between
January and September 2012. This is more
stores than we have ever undertaken before
in a single year and it is testament to our
planning and execution that we kept
disruption to a minimum.
We saw continued strong progress in our
multi-channel business which grew faster
than the market in 2012. Online sales
increased by 39.8%* during the year to
£250.6 million and on a three year basis
have grown by 355%.
* 52 weeks to 1 September 2012 vs 52 weeks
to 27 August 2011
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Throughout 2012 we focused on the relentless
implementation of the four pillars of the
strategy that I set out in October 2011 to build
a leading international, multi-channel brand.
Debenhams plc Annual Report and Accounts 2012 13
Chief Executive’s review continued
I was also pleased with our international
businesses. The franchise stores performed
well with seven new store openings in 2012
and a contracted new store pipeline of
21 stores. Our Danish department store
chain Magasin du Nord had a successful
year, delivering like-for-like sales growth
despite a slowing of the local economy. The
environment is still diffi cult in the Republic
of Ireland but we believe we are gaining
market share. International online has also
been expanded signifi cantly. The number
of countries we deliver to from debenhams.
com outside the UK has expanded from
seven to 66 and we have launched a local
language website in Germany.
For a number of years we have been seeking
to expand our non-clothing business and
we saw further progress in this area in 2012.
Non-clothing accounted for 49% of gross
transaction value in 2012. Health & beauty is
a key part of our non-clothing off er and our
premium health & beauty sales increased by
11%, ahead of the market which grew at 8%
(source: NPD, 52 weeks to end August 2012).
We have also seen traction in areas where we
have been specifi cally targeting market share
growth such as women’s footwear where
market share has increased by 40 basis
points to 2.5% over the year (source: Kantar
52 weeks to 2 September 2012 vs 2011).
Home sales have also held up well in a
diffi cult market, driven by online which
now accounts for over 20% of all home sales.
We have begun to see some real results
from the “Life Made Fabulous” marketing
campaign that ran throughout 2012. Not
only have sales of featured lines been very
strong, but our independently conducted
brand research suggests that attitudes
towards Debenhams are changing in
a very positive way.
In April, we commenced a long-term share
buyback programme and subsequently
purchased £20 million of shares. We expect
to buy back up to £40 million of shares over
the next 12 months.
Next steps: future growth drivers
Whilst I am pleased with the great progress
made over the past year, I am more excited
about what is to come next. You can read
more about future growth drivers in all four
pillars but I would highlight a few areas
where I am impatient for success.
I would include amongst these the work we
are doing on what we call “single view of the
customer” which will give us a clearer
We have begun to see some real results from
the “Life Made Fabulous” marketing campaign
that ran throughout 2012. Not only have sales
of featured lines been very strong but our
independently conducted brand research
suggests that attitudes towards Debenhams
are changing in a positive way.
Focusing on UK retail
Increasing availability and choice through multi-channel
Improving uninvested
core stores
Accelerating store
modernisations
Opening new stores
More choice
and better availability
More ways to shop
Improving the
customer experience
Delivering a compelling customer proposition
Expanding the brand internationally
Brand and product
strategy
Instore execution
Communicating
the proposition
International
franchise stores
Owned international
assets
International online
14 Debenhams plc Annual Report and Accounts 2012
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Outlook for 2013
We believe that customers are to a large
extent acclimatised to the new economic
reality. We do not anticipate a signifi cant
change in the economic environment over
the course of 2013 but we expect to make
further progress during the year as our
strategy delivers further benefi ts. We will
always manage cash, costs, stocks and
margins closely but we are committed
to continue investing in key areas of the
business to deliver long-term sustainable
growth as well as further returns of capital
to drive shareholder value.
Michael Sharp
Chief Executive
perspective on shopping patterns and
customer behaviour. One of the benefi ts
of this will be more tailored marketing
to individual customers because we will
have a better understanding of how they
shop and will be able to personalise our
communications to them. In fact we
are strengthening our overall customer
strategy and insight capability.
With the success of the stores we have
modernised over the past two years,
I would like to have all the outstanding store
modernisations – including Oxford Street –
completed more quickly. But we are working
at full capacity and so our target remains
Christmas 2014 to complete the core store
modernisations, after which we will have
a rolling programme of 10-12 stores a year.
We also need to improve our delivery
promise for customers who shop online.
The groundwork has been done with the
completion of the Sherburn distribution
centre and the conversion of Peterborough
to a fulfi lment centre but we will start to gain
real momentum next year as third party
fulfi lment contracts end and we bring the
majority of online fulfi lment in-house,
thereby allowing us to reduce delivery times
and off er a better range of delivery options.
Executive committee
From left to right: Nikki Zamblera HR Director,
Simon Herrick Chief Financial Offi cer, Richard
Cristofoli Marketing Director, Michael Sharp
Chief Executive, Mike Goring Retail Director,
Suzanne Harlow Group Trading Director.
Debenhams plc Annual Report and Accounts 2012 15
Strategy review
Having opened our doors in 1778,
we are proud of our British
heritage and our role as one of the
UK’s leading department store
groups. There are lots of growth
opportunities in the UK.
Focusing on
UK retail
16 Debenhams plc Annual Report and Accounts 2012
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Improving uninvested
core stores
We are driving sales ahead
of modernisation by focusing
on basic retail standards and
improving choice.
Accelerating store
modernisations
18 stores were modernised in
2012. All remaining uninvested
core stores will be modernised
by Christmas 2014.
Opening new stores
New stores in the UK could
provide an additional £1 billion
of sales. The pipeline stands at
18 stores over the next fi ve years.
Debenhams plc Annual Report and Accounts 2012 17
Strategy review continued
Focusing on UK retail
Improving uninvested core stores
At the end of 2012, there were 30 uninvested
core stores in the UK portfolio of 154 stores.
All of these stores, none of which is loss-
making, will be modernised over the next
two years but we are taking action ahead
of this to improve their performance and
to put these stores in the best possible
position to benefi t from modernisation.
This action is a question of focus rather than
incurring additional costs or capital spend.
Amongst the initiatives we take are
reviewing management teams, undertaking
space optimisation work to ensure each
product category trades from an appropriate
amount of space, replacing choice that may
have been lost through concession closures
over the past few years and improving
presentation standards. In some cases we
hold a pre-modernisation sale to drive sales
and counteract the impact of disruption from
modernisation work.
In 2012 we started to see an improvement
in the performance of the uninvested core
stores as we undertook these actions.
We will continue to pursue this programme
until all these stores have been modernised.
Accelerating store modernisations
We modernise stores for a number of reasons:
to meet customers’ demands for a modern
and contemporary place to shop; to improve
perceptions of the Debenhams brand; to
improve choice to suit the needs of local
markets; and to build a stronger relationship
with our international brands and
concessions. Our thorough planning process,
expertise in implementation and strong
capital discipline result in a modernisation
programme that is delivering increases in
sales and market share and a good return
on investment.
It is not just as case of improving a store’s
infrastructure: in order to achieve acceptable
returns, store modernisations need to give
customers something diff erent. We add
new product off er through additional brands
and categories. We remix space based on
performance, ideal adjacencies and ease
of shopping as well as the Group’s overall
strategy. We invest in the health & beauty
department. We reclaim space from
back-of-house where possible and we
upgrade restaurants, WCs and other services.
In 2012 we modernised 18 stores in two
tranches, one starting in January and the
second in May, and spent some £32 million
in total, averaging £20-25 per sq ft. This was
the most stores we have ever undertaken in
a single year.
The 32 stores which have been modernised
over the past two years are performing well.
On average these stores have recorded a sales
increase in the fi rst year after completion of
c.6%. It is particularly pleasing to note that for
those stores which have completed two years
since modernisation, we have seen a sales
uplift in the second year of an average c.1.5%.
Previous modernisation programmes have
generally achieved a one year increase, after
which stores perform in line with the rest
of the estate. We believe the second year
uplift is due to the extensive nature of the
modernisation work we are undertaking as
well as being a function of the investment
in health & beauty which can take more
than 12 months to translate into higher sales.
Return on investment is averaging 15%.
The remaining 30 uninvested core stores
will be completed in time for Christmas 2014
with 15 taking place in each of 2013 and 2014.
Amongst these is Oxford Street which will be
transformed inside and out by October 2013.
It will become a true company fl agship,
showcasing the best of everything that
Debenhams has to off er and a beacon for
international expansion.
Opening new stores
Debenhams is one of very few UK retailers
with a space expansion strategy. We believe
we could operate up to 225 stores in the UK,
an increase of 70 stores over the current estate.
These stores could add £1 billion of sales
and off er economies of scale which should
provide margin enhancement over time.
Stores will continue to be the largest channel
for the majority of customers despite the
expected growth in online shopping. As
such they form a key component of the
multi-channel shopping environment
and we know that customers who live
near a store spend more online.
We have a strong track record of creating
value from new store openings. The 35 stores
opened since 2007 have delivered an average
return on investment of c.40%. We employ
robust acquisition criteria to ensure every
new store has the right location, the right
developer, the right type and size of store
and the right deal so that it can achieve these
superior levels of return.
Of the 70 potential opportunities in the UK,
at the end of 2012, 18 were contracted and
are expected to open in the next fi ve years.
These stores total 845,000 sq ft of trading
space and have predicted sales in excess of
£150 million at maturity. One has already
opened (Chesterfi eld in September 2012)
with Lichfi eld due to open in March 2013.
Discussions are ongoing on another
25 opportunities.
UK stores at the end of 2012
154
10.9m
Total UK trading space (sq ft)
Store modernisations in 2012
18
30
Modernisations over next two years
New store pipeline
18
£150m
Potential additional sales from pipeline
We operated 154 stores in the UK at the end
of 2012, trading from a total of 10.9 million sq ft.
Our stores vary in size from 13,000 to 200,000
sq ft and are located in high streets, town
shopping centres, regional shopping centres
and retail parks.
18 Debenhams plc Annual Report and Accounts 2012
We are transforming our UK portfolio
by modernising all uninvested core
stores. 32 have already been completed.
The remaining 30 will be completed by
Christmas 2014, including Oxford Street.
We have a track record of delivering strong
fi nancial returns from new stores. The average
return on investment of the 35 stores opened
during the last fi ve years is c.40%. New stores
could add £1 billion of sales in the UK.
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1. Modernising Oxford Street
Our vision is to create a branded
environment that redefi nes Debenhams
in the Oxford Street store and beyond.
2. Improving uninvested core stores
We saw an improvement in the
performance of uninvested core stores in
2012 by focusing on basic retail standards.
3. Opening new stores
Designer at Debenhams Ashley Thomas
opens our new store in Chesterfi eld in
September 2012. Another 17 stores will
open over the next fi ve years.
Debenhams plc Annual Report and Accounts 2012 19
Strategy review continued
Delivering a
compelling customer
proposition
Our customer proposition is based
on a unique, diff erentiated and
exclusive collection of brands,
products and categories within
a wide price architecture.
20 Debenhams plc Annual Report and Accounts 2012
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Brand and product strategy
We off er our customers a
unique, diff erentiated and
exclusive collection of brands,
products and categories.
Instore execution
Raising standards of visual
merchandising and product
presentation reinforces
Debenhams as a modern and
contemporary place to shop.
Communicating the
proposition
Our marketing and PR activities
are fully joined up and we are
speaking with one voice across
all media under the banner
of “Life Made Fabulous.”
Debenhams plc Annual Report and Accounts 2012 21
Strategy review continued
Delivering a compelling customer proposition
Brand and product strategy
Our brand and product strategy gives
customers a unique, exclusive and
diff erentiated choice. It is unique through the
combination of own brands, international
brands and concession brands. It is exclusive
through our core own brands and Designers
at Debenhams which together account for
half of everything we sell. It is diff erentiated
through Designers at Debenhams, which
two-thirds of our customers tell us is an
important reason they shop with us.
An area of focus in 2012 has been the further
development of our non-clothing business,
particularly in areas such as health & beauty,
footwear and accessories where there is clear
market share momentum. Non-clothing
sales accounted for 49% of total sales during
the year, providing the balance and resilience
which is an inherent strength of the
department store model. We are targeting
further growth in non-clothing sales and
market share going forward.
Newness and product innovation are
key to delivering a compelling customer
proposition. We added several new brands
to the portfolio in 2012 . These include:
No.1 by Jenny Packham, a glamorous new
occasionwear range by one of the UK’s best
designers; classic American menswear brand
Nautica which is now available in the UK
exclusively at Debenhams; footwear brand
Call It Spring; and the extension of the
Edition Designer concept into home through
Ashley Thomas, Yukari Sweeney and Carole
Lake. New launches for 2013 include Marios
Schwab in womenswear and Donna & Mark
in childrenswear.
Looking forward, we will drive growth
by investing in our diff erentiated own
bought strategy. In particular, trials in
Red Herring, Principles by Ben de Lisi
and the footwear division will be aiming
to replicate concession sales densities at
own bought gross margins. This requires
end-to-end investment, from buying
and merchandising to supply chain to
marketing to instore resourcing.
Instore execution
Good visual merchandising and product
presentation are key to creating an exciting
shopping experience. Historically, our
standards have been inconsistent across
the store estate and they need to improve.
Creating great looking stores must be a
core competence for the retail community.
We will achieve this by defi ning standards
of merchandising and presentation for
each season in regional “model” stores
and cascading them through the estate,
thereby ensuring that every store team
understands and is equipped to deliver
these standards. Excellence will be rewarded
on a regional basis.
Standards are complemented by increasingly
strong instore graphics and displays which
refl ect the overall marketing and advertising
themes, giving customers a clear
communication trail to follow from advert to
store window to instore collateral to ticketing.
Communicating the proposition
For too long Debenhams was a hidden
secret to all but our regular customers. Our
marketing and brand communication has
improved signifi cantly over the past year
with a joined up approach under the theme
of “Life Made Fabulous”.
We increased our marketing spend in 2012
which has both driven sales and begun to
change perceptions about the Debenhams
brand. We have increased TV advertising at
the times and on the channels our customers
are most likely to see them and we have fully
embraced digital and social media marketing.
Further, we are using the same images and
production values for both premium brand
marketing and promotional marketing,
which in the past had been dissimilar
and confusing.
We saw tangible evidence of market share
growth in some of the categories where
we introduced focused marketing activities.
Women’s footwear market share, for example,
grew by 40 basis points following the launch
of a shoe brochure and prominence in a
number of premium adverts.
We have seen signifi cant shifts in customer
perception in our independently conducted
brand tracker, with greater recognition
for exclusive brands, fashionability
and engagement.
Looking forward, we will continue to invest
in marketing, thereby demonstrating our
continuing confi dence in communicating
the proposition. For the fi rst time in six years
we will have a TV advertising campaign at
Christmas 2012, aiming to increase our share
of voice when the market is at its largest.
Through our work to gain a single view of
the customer we will also be able to drive
sales through more tailored and personalised
communication with customers. There are
also new developments in our successful
Beauty Club loyalty scheme – which already
has 1.3 million cards in regular use – and the
introduction of a new store card and credit
card with a loyalty element.
Designers at Debenhams brands
2012 sales mix of non-clothing categories
26
£552m
49%
40bps
Designers at Debenhams 2012 sales inc VAT
Increase in women’s footwear share
Beauty Club cards in regular use
1.3m
485,000
Facebook fans
Designers at Debenhams is an exclusive
portfolio of diff usion brands designed by
some of the UK’s leading fashion designers.
Our medium-term target for Designer sales
is £750 million.
Non-clothing categories accounted for almost
half of everything we sold in 2012. We saw
good growth in market share in non-clothing
including women’s footwear (source: Kantar
Worldpanel Fashion market share 52 weeks
to 2 September 2012 vs. 2011).
We communicate with our customers in many
diff erent ways including the Beauty Club,
which off ers treats as well as loyalty points
in our premium health & beauty department.
We are increasingly using all forms of social
media as a marketing channel.
22 Debenhams plc Annual Report and Accounts 2012
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2
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1. No. 1 by Jenny Packham
We were delighted to welcome Jenny
Packham to Designers at Debenhams
in 2012 with a glamorous new range of
occasionwear clothing and accessories.
2. Improving instore execution
We are raising our standards of visual
merchandising and product presentation
in our UK stores.
3. Life Made Fabulous
We are investing in marketing through
the “Life Made Fabulous” campaign which
focuses on Designers at Debenhams to
drive sales and improve brand perceptions.
Debenhams plc Annual Report and Accounts 2012 23
Strategy review continued
Increasing availability
and choice through
multi-channel
We defi ne multi-channel retailing
very simply. It is about widening
choice and off ering customers
more ways to shop.
24 Debenhams plc Annual Report and Accounts 2012
More choice and
better availability
We are increasing the choice of
brands, products and categories
that we sell online as well as
improving availability and
working towards off ering a
better range of delivery options.
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More ways to shop
We know that the more ways
we off er customers to shop,
the more they do shop. Multi-
channel customers spend
up to three times more than
single channel customers.
Improving the
customer experience
Growth will come through
making shopping easier for our
customers by better customer
service and encouraging more
customers to shop multi-channel.
Debenhams plc Annual Report and Accounts 2012 25
Strategy review continued
Increasing availability and choice through multi-channel
Our multi-channel business continues
to grow strongly. Online sales increased
by 39.8% in 2012 to £250.6 million*. This
ongoing momentum has led us to increase
our medium-term online sales target from
£500 million to £600 million.
More choice and better availability
Multi-channel is all about choice. Customers
expect the walls of a multi-channel store
to be entirely elastic. As a multi-brand,
multi-category department store
Debenhams is well-placed to meet this
demand. Our online product off er now
encompasses some 110,000 product lines:
one third larger than our biggest store and
fi ve times bigger than the smallest stores.
Online is becoming a key destination for
some key product categories. In 2012, eight
out of ten furniture orders were placed
online. One in three dresses was sold online
– even higher for occasionwear – and one in
fi ve pairs of shoes. Online health & beauty
sales, although still small, increased by 76%.
During the fi rst half of 2012 we introduced
a store-based fulfi lment service we call
Endless Aisle which improves availability by
meeting demand for products which are out
of stock in the fulfi lment centre. By utilising
the stock held on the trading fl oors and stock
rooms of 36 of our largest stores we are able
to meet some 95% of this potentially lost
demand. In 2012 we estimate this accounted
for sales of £16 million. Endless Aisle
reinforces our stores as a vital element
of our multi-channel off er.
A focus in 2013 will be to improve the choice
of delivery options for multi-channel orders.
At present we have a standard delivery
promise of four days as well as off ering
collect from store. Investment in our delivery
infrastructure will allow us to shorten the
delivery promise and off er a range of delivery
options, including next day delivery. These
changes will also improve collation, thereby
improving customer service and improving
the margins of our online business over time
by reducing delivery and logistics costs.
More ways to shop
It is clear that the more ways we give
customers to shop, the more they do shop.
The fastest growing sales channel is mobile.
In 2012, 27% of all visits came from mobile
devices, higher than the industry average
of c.15%. In May 2012 we were among the
fi rst major high street retailers to off er free
wi-fi in all our stores. This is undoubtedly
driving some of the growth in mobile
channel visit numbers. Continuing
to develop our mobile strategy will be
a key focus in 2013 through, for example,
introducing device-specifi c content which
recognises that customers use diff erent
mobile devices to do diff erent things.
The instore kiosks we installed across the
estate in time for Christmas 2011 have been
very successful and customers are using
them to purchase both out of stock and
unranged items. In 2013 new collateral will
be rolled out across the estate to improve
their profi le in store.
Whilst technology is an important part
of giving customers more ways to shop,
more traditional channels such as the home
catalogue which was launched in September
2011 have also proved successful.
Improving the customer experience
In 2012 we made some important changes
in order to improve customer service. Track
and trace is now available on all orders so
customers can follow their deliveries online.
We introduced webchat technology so
that customer service advisors can assist
customers through the website. We also
made the diffi cult decision to close our
customer contact centre in Taunton and
outsource it to a dedicated call centre facility
run by Capita in Leeds. This took eff ect
in August 2012 and is providing us with
industry leading capability and technology
which aims to improve fi rst call resolution,
thereby improving customer satisfaction
and reducing costs.
Our refund policy has been updated to allow
customers to return a product purchased
through one channel to any other channel
that is most convenient for them. Online
shoppers are now able to return goods
to any store, even if it does not stock that
particular item.
Looking forward, growth will come from
improving the visibility of other shopping
channels across all channels to convert
single-channel customers to multi-channel.
So we will be raising awareness of services
such as click and collect and return to store.
We are using vouchers to encourage store
customers to try online shopping, reinforcing
the availability of instore kiosks and
promoting mobile sales channels and
free instore wi-fi .
We will be improving online visual
merchandising and product presentation by
introducing better photography and product
descriptions, particularly in womenswear.
All clothing is now displayed on models,
including childrenswear. We have invested
in an online creative team which is driving
improvements in styling. These initiatives
should also help to reduce the level of
returned goods.
Customers see online and instore as one
Debenhams brand and we as a business
need to see the customer in the same way.
To this end stores are now being credited
with online sales within their locality so
that each channel is focused on meeting
customers’ needs across their own and
all other channels.
* 52 weeks to 1 September 2012 vs 52 weeks to
27 August 2011
2012 online sales
£250.6m
£600m
Medium-term online sales target
177m
11th
200%
537%
Visits to debenhams.com in 2012
Increase in mobile visits in 2012
largest UK online retailer
Increase in iPad visits in 2012
Over the past three years online sales have
grown by more than 350%. This performance
has given us the confi dence to increase our
medium-term sales target for online sales
from £500 million to £600 million.
Visits to debenhams.com increased by 54%
in 2012 to 177 million. We are now the 11th
biggest UK online retailer by traffi c volume,
up from 13th last year (source: IMRG/ Experian
Hitwise Hot Shops List May 2012).
Mobile is by far the fastest growing sales
channel through smartphone and tablet
apps and the mobile website. Mobile visits
increased by over 200% and now account
for 27% of all visits.
26 Debenhams plc Annual Report and Accounts 2012
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1. Raising the visibility of multi-channel
New collateral is being introduced
in stores to reinforce the availability
of other shopping channels.
2. Developing our mobile strategy
We are introducing device specifi c
content, particularly for iPads and
other tablet devices.
3. Home catalogue
Autumn 2012 saw the launch of
the third edition of our catalogue
for the home department.
Debenhams plc Annual Report and Accounts 2012 27
Strategy review continued
Expanding
the brand
internationally
Debenhams is already so much
more than a UK department
store brand. It is available in
92 countries through stores
or online.
28 Debenhams plc Annual Report and Accounts 2012
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International franchise stores
Franchise stores are a proven
low-cost, low-capital way to
expand the brand in distant
and emerging markets. We have
ambitious plans to extend the
franchise programme.
Owned international assets
We own 11 Debenhams stores in
the Republic of Ireland and six in
Denmark which trade as Magasin
du Nord.
International online
We are beginning to see
momentum in international
online which we expect to account
for £100 million of sales over time.
Debenhams plc Annual Report and Accounts 2012 29
Strategy review continued
Expanding the brand internationally
Owned assets
Our owned store portfolio outside the UK
consists of 11 stores in the Republic of Ireland,
which are branded as Debenhams, and six
stores in Denmark which have continued
to operate as Magasin du Nord since their
acquisition in November 2009.
Magasin had a good year with like-for-like
sales increasing by 4.6% in local currency.
During 2012 the Danish business was
integrated into the Debenhams retail
operational management through the
international division. This will allow
for a faster and more eff ective exchange
of ideas and roll out of best practice.
Since acquisition Magasin du Nord has
increased sales and margins through the
introduction of both Debenhams own
brands and Magasin branded volume lines.
There is more benefi t to come from this in
future years. Although the propensity for
online shopping is low and multi-channel
virtually unknown amongst Danish
consumers at this time, this will change
and we are well placed to take advantage
of changing trends.
The business in the Republic of Ireland has
been aff ected by the extremely diffi cult
economic environment. However it does
appear to be stabilising and we believe
we are gaining market share.
International online
Online retailing is a key part of our plans for
international expansion. Over the medium-
term we anticipate it will generate sales of
some £100 million.
Our strategy is two-fold. For major markets
we will develop a series of country specifi c
websites, which are presented in the local
language and transact in local currency. In
other markets we will use overseas delivery
from the UK. We made progress in both these
areas during 2012.
The development of country specifi c
websites is facilitated by the investment
made over the past year in the latest
Websphere 7 internet technology. An Irish
website has been operating since Autumn
2010. The fi rst local language site was
launched in Germany in summer 2012.
We will monitor the performance of
debenhams.de and learn lessons from
it before introducing further websites
in major markets.
During the course of the year the number
of countries we deliver to through
debenhams.com outside the UK increased
from seven to 66. Expansion to another
30 countries is planned.
Debenhams is already so much more than
a UK department store. We are extremely
proud of our British roots, but over time
we believe that sales generated from outside
the UK should exceed those from within
our home market.
Franchise stores
During 2012 we celebrated the 15th
anniversary of the opening of our fi rst
franchise store in Bahrain. We continue to
believe that in most distant and emerging
markets this proven low capital, low cost
franchise model is the way to extend the reach
of the Debenhams brand outside the UK.
The key to a successful franchise store
programme is having the right partners.
Our partners are retailers with considerable
experience of operating in their local markets
as well as the resources to make the
signifi cant investment in capital and costs
required to build and run a department store.
We entered two new markets in 2012, Russia
and Pakistan. We also opened new stores
in India, the Philippines and Iran. By the
end of the year our franchise partners were
operating from 68 stores across 25 countries,
a net increase of four stores during the year.
In 2013, seven new stores are scheduled to
open in both existing markets – Indonesia,
Malta, Saudi Arabia and the UAE – and new
markets Bulgaria, Georgia and Libya. Beyond
this, the contracted store pipeline comprises
14 stores which are expected to open over
the subsequent three years. We are in
discussions on another 50 or so stores.
As a result of the strength of the new store
pipeline, we have increased our fi ve year
franchise store target from 130 to 150.
2012 international sales growth*
Franchise stores at end of 2012
Countries we deliver to outside UK
2.7%
18.5%
68
150
66
£100m
2012 international operating profi t growth
Five year target for franchise stores
International online sales target
The international segment performed
well in 2012 with sales growing by 2.7% to
£503.4 million and operating profi t growing by
18.5% to £30.7 million. The main drivers of this
were the franchise stores and Magasin du Nord.
*52 weeks to 1 September 2012 vs 52 weeks to 27 August 2011
30 Debenhams plc Annual Report and Accounts 2012
The contracted new store pipeline stands at
21 stores with a further 50 in discussion. We
will be opening in a number of new markets
including Bulgaria, Estonia, Georgia and Libya.
Although small at present, we have ambitious
plans for international online. Our approach is
for local websites in major markets and online
delivery in other markets.
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1
2
3
1. Welcome to Russia
Designers at Debenhams Ben de Lisi,
Aliza Reger, John Rocha and Julien
Macdonald at the launch of the fi rst
franchise store in Russia.
2. Magasin du Nord
Our Danish department store chain had
a good year in 2012 with like-for-like sales
growth of 4.6% in local currency.
3. Guten Tag Deutschland
The fi rst local language, local currency
website launched in Germany during 2012.
Debenhams plc Annual Report and Accounts 2012 31
Finance and
risk review
Over the next few pages we
demonstrate our strong fi nancial
position and how we are protecting
shareholder returns by managing risks.
Chief Financial Offi cer’s review p34
Risk review p39
For more information go to
ar12.debenhamsplc.com
32 Debenhams plc Annual Report and Accounts 2012
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Debenhams plc Annual Report and Accounts 2012 33
Chief Financial Offi cer’s review
Building strong foundations
Simon Herrick, Chief Financial Offi cer
We made good progress in 2012.
Gross transaction value, like-for-like sales, profi t
before tax and earnings per share all increased*.
Net debt improved and we completed the fi rst
tranche of the share buyback programme.
*52 weeks to 1 September 2012 vs 52 weeks to 27 August 2011
34 Debenhams plc Annual Report and Accounts 2012
Note: The Financial Statements for the period
ended 3 September 2011 included 53 weeks.
Therefore all comparative income statement
numbers for the 2011 fi nancial year relate
to the 52 weeks of trading to 27 August 2011.
Management believes that comparing
like-for-like 52 week periods demonstrates
the underlying performance of the business.
Comparative cash fl ow numbers refl ect the
full 53 weeks to 3 September 2011 and the
comparative balance sheet is also at this date.
Sales and profi t performance
Debenhams delivered a good performance
in 2012 given the challenging market
conditions. Key fi nancial metrics are
summarised in fi gure 1 whilst our key
performance indicators are described
in detail on page 6.
Group
The Debenhams brand trades through
239 stores in 28 countries and online in
67 countries.
The total trading space of owned stores as
at 1 September 2012 was 12,521,000 sq ft,
an increase of 78,000 sq ft (0.6%) during
the course of the year.
Group gross transaction value increased
by 2.6% to £2,708.0 million for the 52 weeks
to 1 September 2012 (2011: £2,639.5 million).
Group revenue increased by 2.5% from
£2,176.4 million to £2,229.8 million. Group
like-for-like sales grew by 2.3% including
VAT and by 1.6% excluding VAT.
Group gross margin decreased by 30 basis
points during the year due to a largely
weather-related sales mix change towards
health & beauty, which has a lower gross
margin than own bought clothing, and to
Figure 1: Financial summary
higher concession sales. The promotional
calendar was largely unchanged from last
year as stocks were very tightly controlled
across the business given the diffi cult
market conditions.
Profi t before tax for the year increased by
4.2% to £158.3 million (2011: £151.9 million).
The use of “headline profi t before tax” was
discontinued during 2012 as the quantum
of the amortisation of capitalised bank fees
which constituted the diff erence between
the reported and headline metrics has
become small enough that the distinction
is no longer necessary.
Profi t after tax increased by 12.8% to
£125.3 million, largely due to both lower
taxation and interest as detailed on page 37.
Basic earnings per share for 2012 were 9.8
pence (2011: 8.6 pence) and diluted earnings
per share were 9.8 pence (2011: 8.6 pence).
Segmental performance
Debenhams is adopting a new segmental
analysis which better represents the way
we manage the Group. This will provide
sales and operating profi t information for
two segments: UK and international. Each
segment represents the performance of
one pillar of the four pillar Debenhams’
strategy. The UK segment will refl ect the
performance of “Focusing on UK retail”,
while the international segment will refl ect
“Expanding the brand internationally”.
The results of the pillar “Improving choice
and availability through multi-channel”
are split between the two segments based
on customer location.
Gross transaction value – Group
Gross transaction value – UK
Gross transaction value – international
Like-for -like sales exc VAT
Revenue – Group
Revenue – UK
Revenue – international
Operating profi t – Group
Operating profi t – UK
Operating profi t – international
Net interest
Profi t before tax
Basic earnings per share
Diluted earnings per share
Dividend per share
52 weeks to
1 September
2012
£2,708.0m
£2,204.6m
£503.4m
1.6%
£2,229.8m
£1,860.3m
£369.5m
£175.0m
£144.3m
£30.7m
£16.7m
£158.3m
9.8p
9.8p
3.3p
52 weeks to
27 August
2011
£2,639.5m
£2,149.5m
£490.0m
n/a
53 weeks to
3 September
2011
£2,679.3m
£2,181.1m
£498.2m
n/a
£2,176.4m £2,209.8m
£1,850.6m
£1,823.1m
£359.2m
£353.3m
£183.7m
£175.0m
£156.2m
£149.1m
£27.5m
£25.9m
£23.4m
£23.1m
£160.3m
£151.9m
9.1p
8.6p
9.1p
8.6p
3.0p
3.0p
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Debenhams plc Annual Report and Accounts 2012 35
Chief Financial Offi cer’s review continued
UK
The UK segment comprises 154 stores in the
UK plus online deliveries to UK customers.
During the year we opened two new stores
and modernised 18.
UK gross transaction value increased by
2.6% to £2,204.6 million for the 52 weeks
to 1 September 2012. Revenue increased
by 2.0% to £1,860.3 million.
Sales growth in the UK was driven by a
number of factors.
• Good performance from the 32 stores
which have been modernised since 2010.
Stores modernised for one year are
achieving a sales uplift of c.6% during
the fi rst year. Those stores which have
completed two years since modernisation
are achieving a further average uplift of
c.1.5% in the second year. This is signifi cant
because previous modernisation
programmes have generally only delivered
a fi rst year uplift
• An improved performance from
uninvested core stores (i.e. those awaiting
modernisation) following the introduction
of initiatives to improve basic retail practices
• Market share gains in key categories
including womenswear, menswear and
health & beauty (sources: Kantar
Worldpanel Fashion Market Share, NPD)
• Improvements in our marketing activities
and higher marketing spend that is both
driving sales and improving perceptions
about the Debenhams brand
• Growth in online sales
EBITDA for the UK segment decreased
by 0.2% to £224.8 million. UK operating
profi t for the UK segment decreased by
Figure 2: Cash fl ow and uses of cash
3.2% to £144.3 million, largely as a result
of higher depreciation.
International
The international segment represents 85
stores, comprising 11 Debenhams stores in
the Republic of Ireland, six Magasin du Nord
stores in Denmark, the 68 international
franchise stores and online sales to
customers outside of the UK. During the year
we opened seven franchise stores including
two new markets and closed three stores.
International gross transaction value
increased by 2.7% to £503.4 million.
Revenue increased by 4.6% to £369.5 million.
The key drivers of international sales growth
during the year were:
• A strong performance from Magasin du
Nord which recorded like-for-like sales
growth of 4.6% in local currency
• Good results from the international
franchise stores. Seven new stores opened
over the course of the year (two each in
India and the Philippines, one each in Iran,
Pakistan and Russia). Three stores closed
(one each in Moldova, Romania and
Slovakia) resulting in a total of 68 stores
in 25 countries at the end of the year
• A growing international online business.
During the year the number of countries
able to transact through debenhams.com
outside the UK increased from seven to 66.
A local language website was launched
in Germany
EBITDA for the international segment
increased by 10.8% to £42.0 million.
Operating profi t for the international segment
increased by 18.5% to £30.7 million. Improved
profi tability was driven by higher sales.
EBITDA
Working capital
Proceeds from sale of fi xed asset investments
Capital expenditure and investments
Operating cash fl ow before fi nancing and taxation
Taxation
Financing
Dividends paid
Share buyback
Other
Change in net debt
Opening net debt
Closing net debt
*Adjustment for property sales and leaseback transactions
52 weeks to
1 September
2012
£266.8m
£(7.1)m
–
£(118.6)m
£141.1m
£(44.6)m
£(13.6)m
£(38.5)m
£(20.1)m
£(9.3)m
£15.0m
£383.7m
£368.7m
53 weeks to
3 September
2011*
£272.2m
£(22.6)m
£5.0m
£(114.0)m
£140.6m
£(48.6)m
£(25.6)m
£(12.9)m
–
£79.6m
£133.1m
£516.8m
£383.7m
36 Debenhams plc Annual Report and Accounts 2012
£23.1 million). This refl ects the lower interest
rate associated with the refi nancing of the
senior credit facility in July 2011 and a
reduction in the Group’s level of debt.
Taxation
The Group’s tax charge of £33.0 million on
a profi t of £158.3 million gave an eff ective tax
rate of 20.8% compared with 26.9% for the
prior year. The decline in eff ective rate is in
part due to reductions in the headline rate
of corporation tax (accounting for 2.0% of
the 6.1% nominal decrease) with the balance
largely due to the resolution of historical
issues net of current year contingencies.
Earnings per share
Total basic and diluted earnings per share
were 9.8 pence, compared with 8.6 pence for
the 52 weeks to 27 August 2011. The weighted
average number of shares in issue in 2012
was 1,281.3 million (2011: 1,286.5 million).
Cash fl ow and uses of cash
Debenhams remains a highly cash
generative business and has clear priorities
for the uses of cash which are:
1. Invest in the business to support the
four pillars of the strategy
2. Grow dividend cover in line with
maintaining dividend cover of three
times earnings
3. Move towards one times net debt to
EBITDA over the medium-term
4. Return surplus cash to shareholders
through a long-term share buyback
programme
Group costs
Ensuring the business has an appropriate
and well-controlled cost base continues to be
an important area of focus and we maintain
very strong cost management disciplines
across all areas of the business. The main cost
categories are described in terms of their
percentage of gross transaction value.
• Store payroll as a ratio to gross transaction
improved to 10.5% (2011: 10.9%), largely as a
result of effi ciency savings, in particular in
relation to the employment of temporary
staff over the peak trading period
• Store rent as a ratio to gross transaction
value decreased from 7.0% last year to
6.8% this year
• Warehousing and distribution costs as a
ratio to GTV increased from 2.6% to 3.0%
as a result of higher levels of activity in
the multi-channel business
• Other costs comprise a number of
components, not least buying and
merchandising, marketing, pension and
the costs associated with the multi-channel
business. We are investing in a number
of these areas to ensure Debenhams can
deliver sustainable, long-term sales growth.
As a result, other costs as a percentage
of gross transaction value increased by
20 basis points during 2012
Depreciation
Group depreciation and amortisation of £91.6
million increased by 1.7% versus last year
(2011: £90.1 million) as they begin to refl ect
increased investment in capital expenditure.
Financing income and expense
The net interest cost of £16.7 million for the
52 weeks to 1 September 2012 represented
a decline of 27.7% from last year (2011:
Figure 3: Capital expenditure
New UK stores
UK store modernisations
UK maintenance
International
Group systems
Group warehouse
Other
FY 2012
9%
27%
23%
6%
21%
9%
5%
New UK stores
UK store modernisations
UK maintenance
International
Group systems
Group warehouse
Head office move
Other
FY 2013 guidance
10%
29%
15%
8%
20%
5%
9%
4%
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Cash fl ow generation, the uses of cash and
the movement in net debt are summarised
in fi gure 2.
Operating cash fl ow before fi nancing and
taxation was £141.1 million. We used this cash
to pay taxation of £44.6 million and fi nancing
of £13.6 million. Payment of the 2011 fi nal
dividend and 2012 interim dividend
accounted for £38.5 million. A further
£20.1 million was spent on share buybacks.
Capital expenditure
Capital expenditure during the year was
£118.6 million, an increase of 4.0% versus
the previous year (2011: £114.0 million).
The key components of capital expenditure
are detailed in fi gure 3 as is guidance for
capital expenditure in 2013.
Dividends
An interim dividend of 1.0 pence per share
was paid to shareholders on 6 July 2012.
The board is recommending a fi nal dividend
of 2.3 pence per share (2011: 2.0 pence) which
will be paid to shareholders on 11 January
2013, taking the total dividend for the year
to 3.3 pence (2011: 3.0 pence).
Share buyback programme
In October 2011 the board announced that
as it could see no benefi t in leverage below
1 times EBITDA, it intended to commence
a long-term share buyback programme as
leverage approached this 1 times. It was
subsequently announced at the interim
results in April 2012 that this programme
would commence with the initial purchase
of £20 million of shares during the following
six months. This was duly completed by the
end of August 2012. The total number of
shares bought was 23.6 million, consuming
£20.1 million of cash. These shares are
currently held as treasury shares.
Net debt
The Group’s net debt position as at
1 September 2012 was £368.7 million
(3 September 2011: £383.7 million), a
reduction of £15.0 million during the course
of the year after the share buyback. As a
consequence the ratio of reported net debt
to EBITDA remained at 1.4 times.
Debenhams plc Annual Report and Accounts 2012 37
Chief Financial Offi cer’s review continued
Balance sheet
Key balance sheet items are summarised
in fi gure 4.
Reported net assets were £661.0 million
representing an increase of £1.4 million from
the Balance Sheet at 3 September 2011.
Inventory
Stock levels continued to be managed very
tightly during the year given the diffi cult
market conditions. Store stock levels were
fl at on the prior year whilst stock levels in
the online and international businesses
increased in line with growing demand.
As a result, total stock increased by 3.4% to
£332.3 million. Terminal stock at year end of
2.6% was in line with the long-term average.
Pensions
The Group provides a number of pension
arrangements for its employees. These
include the Debenhams Retirement Scheme
and the Debenhams Executive Pension Plan
(together the “Group’s pension schemes”)
which closed for future service accrual from
31 October 2006. Under IAS 19, the Group’s
pension schemes’ defi cit as at 1 September
2012 was £57.3 million (3 September 2011:
£3.9 million surplus). Further information
can be found in note 23 to the Group fi nancial
statements starting on page 107.
Future pension arrangements will be
provided for Debenhams’ employees
by a money purchase stakeholder plan
or defi ned contribution pension schemes.
During March this year the triennial actuarial
valuation was completed and discussions
with the pension fund trustees were
concluded. The contributions from the
Company and the investment strategies
Figure 4: Balance sheet
Intangible assets
Property, plant and equipment
Inventory
Other assets
Trade and other payables
Other liabilities
Retirement benefi t (obligations)/assets
Deferred tax assets/liabilities
Net debt
Reported net assets
devised by the trustees are intended to
restore the schemes to a fully funded position
on an ongoing basis by the end of March
2022 (Debenhams Retirement Scheme) and
August 2021 (Debenhams Executive Pension
Plan). As a consequence of this agreed plan,
annual contributions to the two funds were
set at £8.9 million, rising each year in line
with the RPI. The Company also pays the
non-investment expenses and levies to
the Pension Protection Fund.
Financial position
In July 2011, the Group refi nanced its
£650 million senior credit facility which
has a maturity date of October 2015, with
an option to extend further to October 2016.
The facility comprises a £250 million term loan
and a £400 million revolving credit facility.
The senior credit facility contains fi xed
charge cover and leverage covenants, which
were both met in full during the year. The
directors believe that the Group has suffi cient
headroom to ensure compliance for the
foreseeable future.
Financing risk and
treasury management
The board has established an overall treasury
policy and has approved authority levels
within which the treasury function must
operate. Treasury policy is to manage risks
within the agreed framework whilst not
taking speculative positions.
The policies and strategies for managing
fi nancial risks are disclosed in note 21 of
the Group fi nancial statements starting
on page 101.
Simon Herrick
Chief Financial Offi cer
1 September
2012
£864.9m
£661.6m
£332.3m
£105.2m
£(525.4)m
£(370.1)m
£(57.3)m
£18.5m
£(368.7)m
£661.0m
3 September
2011
£858.1m
£634.6m
£321.3m
£95.6m
£(489.1)m
£(382.7)m
£3.9m
£1.6m
£(383.7)m
£659.6m
38 Debenhams plc Annual Report and Accounts 2012
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Eff ective management of risks and
opportunities is essential if Debenhams
is to deliver its strategic and operational
goals, protect its reputation and
ultimately enhance shareholder value.
To support this system for internal control,
the Debenhams risk management
framework (fi gure 1) has been developed
using the principles of the international
standard ISO 31000 (Risk Management).
The board, which has overall responsibility
for risk management and internal control,
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.
In order to identify and manage risks
eff ectively, a risk management framework has
been developed, which includes: processes to
identify the risks facing the Group; a process
to evaluate the potential impact of risks;
appropriate controls and strategies to treat the
risks; reporting requirements for changes to
the risk profi le; and details of specifi c roles and
responsibilities relating to the management
of risk. Management is expected to utilise the
risk management framework when assessing
risks and implementing suitable controls.
Risk management framework
The board is responsible for the Group’s
system of internal control, which is based
on the COSO model (covering control
environment, risk assessment, information
and communication, control activities
and monitoring) and for reviewing the
eff ectiveness of the internal control systems
in place. Such systems are designed to
manage rather than eliminate the risk
of failure to achieve the strategic business
objectives. They can only provide reasonable
and not absolute assurance against material
misstatement or loss. The board has
conducted a review of the eff ectiveness
of internal controls and is satisfi ed that
the controls in place remain appropriate.
The board exemplifi es the control
environment to its stakeholders through
its compliance with the UK Corporate
Governance Code, Debenhams’ policies
and procedures and, in particular, policies
covering risk management, code of business
conduct and anti-bribery and corruption.
This framework highlights the central role
that the management of risk plays in the
successful delivery of strategic objectives
and the fact that this process is dependent
on people fulfi lling their clearly defi ned
roles and responsibilities.
The key points of the process are described
in more detail below.
Risk identifi cation
Risks exist within all operations and it is
important to identify them in order to
understand the degree to which their
occurrence would threaten the delivery
of key objectives.
Risks are identifi ed through a number of
routes. They include membership of industry
bodies, environmental scanning (i.e. market
research), changes to legislation, enterprise
risk management best practices, strategic
planning exercises, ongoing operational
reviews by management, project governance
processes, internal audits and control
environment reviews.
Whilst there are ongoing monitors in place,
the most extensive piece of work undertaken
to identify risks is the annual organisation-
wide review facilitated by the risk
management team. This was most recently
conducted in October 2012. All senior
managers participate in the exercise,
including the board. It considers strategy,
objectives and risks to their achievement
together with the existing and new controls
required to mitigate risk. The outputs from
this process are collated into the Group’s risk
register and are taken into consideration
when setting the annual internal audit plan.
Management is required to update the
register with any new or emerging risks
as they are identifi ed.
Figure 1: Debenhams risk management framework
s
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i
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e
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t
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Executive directors
Strategic objectives
Report
Define risk appetite
Risk reporting
Audit Committee
t
a
e
r
T
Define principal risks
and risk treatment
Risk management
team
Risk identification
Divisions
Risk identification
Risk evaluation
Evaluate
Strategic objectives
Specialist functions
I
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r
a
t
e
g
i
c
o
b
j
e
c
t
i
v
e
s
Debenhams plc Annual Report and Accounts 2012 39
Risk review continued
Risk evaluation
In order to understand the impact specifi c
risks would have to the Group, each risk is
evaluated based on the likelihood of
occurrence and its severity.
The risk ranking matrix (fi gure 2) has
been developed to ensure that a consistent
approach is taken when assessing the overall
impact to the Group. Likelihood is based
on the frequency of occurrence in a rolling
12 month period and severity is determined
by the degree of change across key
performance indicators.
Management is responsible for ensuring
that risks are evaluated correctly, with
support from the fi nance department
as required. Individual managers consider
the cumulative impact of all risks across
their particular area of operation when
determining the state of their overall control
environment. The purpose of this exercise
is to calculate the risk score for each risk
identifi ed, which determines the level of
treatment expected.
The board reviews the key risks to the Group,
taking action to strengthen where necessary,
and the output from this is used to populate
the Group’s risk map.
Risk treatment
The board is responsible for determining
the nature and extent of the risks it is willing
to take in achieving its strategic objectives,
which is defi ned as the risk appetite and is
outlined in fi gure 3.
Risk scores are compared to the risk appetite
matrix, which provides guidance on the
expected level of treatment, timeframes
and authority levels. The four methods
used to treat risk are:
• Tolerate (accept risk and take no
further action)
• Treat (reduce risk by defi ning and
completing appropriate actions to
improve or implement controls)
• Transfer (share a risk via insurance policies
or asking a third party to take the risk in
another way)
• Terminate (avoid risk quickly and decisively
by eliminating or re-engineering the
activities that lead to the risk occurring)
40 Debenhams plc Annual Report and Accounts 2012
Risk reporting and monitoring
Individual managers are expected to
defi ne and analyse the reports they require
to enhance fi nancial and operational
performance and identify emerging risks
or control failures.
Financial performance is monitored through
a number of processes. An operating plan
is prepared in August of each year, shortly
before the start of the fi nancial year and
a revised forecast is prepared each month
of the fi nancial year which analyses actual
performance and highlights variances
against the plan. In particular, performance
is monitored through a series of key metrics.
Daily sales, weekly sales and margin and
monthly management accounts are
prepared, all of which report on performance
against the operating plan, last year and
forecast. Additionally, a treasury report is
made to each board meeting which covers
matters such as senior operating restrictions,
covenant reporting and forecasting (under
the Group’s banking facilities), exposure to
foreign exchange and hedging arrangements,
net debt and interest rate hedging, cash fl ow
and cash fl ow forecasting and amounts
deposited with counterparties.
Performance is reviewed at board meetings,
senior management meetings, Audit
Committee, business continuity
management committee and executive
health and safety meetings. There are also
other mechanisms in place to monitor risks
such as internal audit reviews, critical and
serious risk monitor, fraud detection systems,
whistleblowing, stock counts and security
equipment such as CCTV.
In addition, the Audit Committee satisfi es
itself that key risks are being monitored by
senior management and that the internal
audit plan is focused on high priority areas.
The internal audit team updates the board
and the Audit Committee on the eff ectiveness
of risk management within each discrete
area audited throughout the year. The Audit
Committee will bring any areas of concern
to the attention of the board.
Roles and responsibilities
The eff ective management of risk is reliant
upon all employees successfully performing
their specifi c roles and responsibilities
and individual managers are expected
to familiarise themselves with their
responsibilities, which are outlined below,
and to act accordingly.
Only suitably qualifi ed employees are
responsible for each of the functions
within the Group to ensure that each area
operates eff ectively. Training, performance
reviews and support mechanisms are in
place to ensure performance standards
are maintained.
Board of directors
The board of directors is responsible for:
approving the risk management policy
and related framework; setting and
communicating the Group’s risk appetite
and related policies; setting the tone and
culture for managing risk; providing
strategic direction and guidance on risk
related decision making; ensuring that risk
management processes are adopted across
the whole Group; obtaining assurance on
the eff ectiveness and compliance with the
risk management framework; reporting
Figure 2: Risk ranking matrix
t
n
e
u
q
e
r
F
n
o
m
m
o
C
l
a
n
o
i
s
a
c
c
O
y
l
e
k
i
l
n
U
d
o
o
h
i
l
e
k
i
L
4
3
2
1
4
3
2
1
Low
1 (12)
Impact
16
12
8
4
36
64
27
48
18
32
9
16
Moderate
4 (22)
Serious
9 (32)
Critical
16 (42)
on the management of risk to stakeholders;
and signing off public disclosures related
to risk and risk management.
Divisional directors
and heads of function
Divisional directors and heads of function are
responsible for: identifying and evaluating
the risks that relate to their areas and
activities; implementing appropriate controls
to manage risks in line with the Group’s risk
appetite; and taking ownership for risks and
controls within their area of responsibility.
All employees
All employees are responsible for: being
aware of the risks that relate to their roles
and their activities; continuously improving
their management of risk; implementing
appropriate controls to manage risks; and
reporting ineff ective and/or ineffi cient
controls wherever they sit.
Risk management
and internal audit function
The Group’s risk management and internal
audit function is made up of three discrete
areas: risk management, internal audit and
profi t protection. This combination enables
the Group to maintain a cohesive approach
to all aspects of risk management whilst
allowing the internal audit team to benefi t
from the insights that other areas of the
function can provide.
Risk management team
The risk management team is responsible
for: developing, implementing and reviewing
the risk management framework and
process; promoting eff ective risk
management at all levels of the Group;
encouraging an appropriate risk culture
within the Group; liaising with other
functions that advise on specialist areas;
coordinating responses where risks impact
more than one area; reporting, escalating
and communicating risk management issues
to key stakeholders; and providing assurance
regarding risk management within the
Group. In addition, the team manages
corporate insurance and undertakes
business continuity planning activities.
Internal audit team
In relation to risk management, the internal
audit team is responsible for providing
independent assessment of: the design,
operation and eff ectiveness of the risk
management framework and process;
management of key risks, including the
eff ectiveness of the controls; reporting
of risk and control status; reliability of
assurances provided by management
relating to risk management.
Profi t protection
The profi t protection team’s responsibilities
include activities such as: ensuring
loss prevention strategies are developed
and implemented, anti-fraud monitoring
across the Group and the management
of whistleblowing.
Whistleblowing
All Debenhams’ employees are required to
adhere to the code of business conduct and
the anti-bribery and corruption policy, with
senior employees required to confi rm their
compliance in writing. These policies set out
the ethical standards expected by the Group
and include details of how matters can be
raised in strict confi dence. Two main routes
are available to employees at all levels within
the Group to raise concerns over
malpractices. The fi rst, “Employees’
guidelines to problem solving”, encourages
employees to talk to their line manager, their
manager’s line manager or, if still concerned,
to call HR Connect (the central human
resources team) directly. The second route is
a confi dential reporting line through which
employees can speak to the Group anti-fraud
team. If an employee feels that the matter is
so serious that it cannot be discussed in any
of these ways, s/he can contact the Company
Secretary or the Director of Internal Audit
and Risk Management. The Group’s policy
on whistleblowing and these methods of
raising issues of concern are published on
Debenhams’ intranet and emphasised on
posters. The policy is reviewed annually by
the Audit Committee. All serious matters
identifi ed are raised with the chairman of
the Audit Committee.
Figure 3: Risk appetite matrix
Action
Optional
Optional
Risk matrix
zone
Green
(Limited)
Yellow
(Moderate)
Orange
(Signifi cant) Yes
Red
(Ultimate)
Yes
9-12 months
Treatment
timeframe
Risk
acceptance
owner
Head of
department
Risk
response
Treat or
tolerate
Treat or
tolerate
Treat, transfer
or terminate
Treat, transfer
or terminate 0-3 months Main board
Line director
Executive
director
6-9 months
3-6 months
Risk score
1, 2, 3 or 4
8, 9 or 12
16, 18 or 27
32, 36, 48
or 64
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Business continuity planning
The business continuity committee
comprises the Chief Financial Offi cer,
Retail Director, HR Director and Director
of Internal Audit and Risk Management.
Other executives are invited to attend
meetings as and when appropriate.
The objectives of this committee are to
ensure that potential threats to the Group
and the impact that those threats might
cause have been identifi ed, that a framework
to build organisational resilience to known
threats is in place and that the framework
is capable of providing an eff ective response
to safeguard the Group.
The committee uses a framework based
on ISO 22301:2012 (Business Continuity
Management Systems) and undertakes
a number of key activities. These are to
review and agree: the business continuity
management policy and how it will be
managed and communicated; the risks
and threats facing the Group and prioritise
them based on the evaluation of their
severity and likelihood; the business
continuity management strategy; the
business continuity management response
and its implementation; the process for
exercising, maintaining and reviewing
business continuity management
arrangements; and the mechanisms to
embed business continuity management
in the Group’s culture.
Principal risks and uncertainties
The risks detailed on pages 42 to 45 and in
the Notes to the Financial Statements are the
principal risks and uncertainties that may
impact the Group’s ability to achieve its
strategic and operational goals. Both external
factors, such as the economic environment,
and internal factors, such as the retention of
key management, are included in the risks
and uncertainties that could substantially
impact performance. Relevant mitigation
for each risk is also outlined. These risks are
presented in no particular order.
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.
Debenhams plc Annual Report and Accounts 2012 41
Risk review continued
External risk
Risk and impact
Consistent fall in customer spending
as a result of economic downturn,
infl ation or defl ation
Reduction in gross transaction value and a
decline in sales on discretionary purchases
Competitive pressures in existing
markets infl uence customer behaviour
Place pressure on our pricing strategy,
margins and profi tability
Factors infl uencing the sustainability
of the supply chain
Place pressure on margin and will also divert
fi nancial and management resources from
more benefi cial uses
Example of mitigation
Change*
The board conducts strategic business reviews which ensure that
management is focused on key priorities and cost control. These reviews
also focus on the four pillars of the Group’s strategy to build a leading
international, multi-channel brand.
Debenhams’ brand and product strategy gives customers a unique,
diff erentiated and exclusive choice of brand, products and categories within
a good/better/best pricing architecture. An understanding of customers
and their needs is developed by listening to their views, market intelligence
and reviewing key performance indicators which ensures that pricing is
competitive. Debenhams is investing additional resources in customer
analytics and insight.
Debenhams fosters excellent relationships with its suppliers that
are mutually benefi cial. Both parties work towards the objective of
optimising sustainable fulfi lment and costs, which is measured regularly
by management through key performance indicators. Alongside this,
Debenhams develops multiple sourcing routes to ensure pricing remains
competitive and that demand can be supplied.
Debenhams and its suppliers will continue to work hard to deliver the best
performance possible in a very challenging market.
Loss of profi t or additional expenditure
caused by increased energy or fuel costs
Place pressure on margin and will also divert
fi nancial and management resources from
more benefi cial uses
A key objective of the energy committee is to control energy usage,
including the impact of the Carbon Reduction Commitment scheme.
An energy hedging policy is in place to provide a high degree of
cost certainty.
Financial risk
Risk and impact
Example of mitigation
Change*
Risks associated with currency,
hedging, interest rates, credit,
counterparties and fi nancial
covenants under the credit facilities
Debenhams has a treasury policy in place which covers counterparty
limits and hedging for interest rates, foreign exchange and energy.
There is also an internal treasury function which is mandated by
the board and audited annually.
Hinder ability to adjust rapidly to changing
market conditions and impact earnings
and cash fl ow
Debenhams closely monitors all aspects of cash management to optimise
balance sheet metrics. Eff ectiveness is measured regularly by management
through a series of key performance indicators.
Hedging strategy may not adequately
protect operating results from the impact of
exchange rate fl uctuations or may limit any
benefi t caused by favourable movements
in exchange rates
Aff ect available cash and liquidity and could
have material eff ect on the business, results
of operations and fi nancial condition
Business critical spreadsheets and databases used by the fi nance
department have been identifi ed and appropriate control measures
are used in line with Debenhams’ policy to ensure data integrity.
Shortfall in the pension fund
Increases in pension related liabilities could
impact profi ts and cash fl ow
The trustees of the Group’s pension schemes carefully monitor the pension
fund and alter the investment strategy as appropriate. Any shortfall in
funding is brought to the attention of the board.
Please refer to the Notes to the Financial Statements for other risks in this category
*Change in severity and/or likelihood of risk during course of 2012
42 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Strategic risk
Risk and impact
Inability to predict or fulfi l customer
demands or preferences
Sales will be lower, market share reduced
and will be forced to rely on markdown
and promotions to dispose of excess or
slow moving inventory. May be inventory
shortfalls on popular merchandise
Departure of key personnel and failure
to attract or retain talent
Signifi cantly delay or prevent achievement
of strategy
Failure to achieve the new store roll
out or acquisition targets
Reduced growth or a decline in gross
transaction value and may be required to
write down the value of any stock acquired
for sale in an uncompleted store
Example of mitigation
Change*
Debenhams utilises market, trend and customer awareness research
to understand current demands and preferences. It delivers these
requirements through multiple channels, including its store and non-store
sales channels. To achieve this these channels are constantly developed
and high operational standards maintained to diff erentiate from
competitors. Stock levels and the supply chain are monitored closely
in order to ensure product newness is maximised.
This is a decreasing risk as a number of strategic projects have been
undertaken to improve our understanding of our customers.
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.
Debenhams undertakes research of key markets and demographics to
identify potential locations to drive growth through new space. A full
investment appraisal is conducted as part of the decision making process
and a specialist team has responsibility for end-to-end management
of each project once the decision is made.
Failure of ethical trading policy, poor
perception in the market on corporate
responsibility matters or negative
impact to brand due to product quality,
supply chain practices, health and
safety etc.
Negative eff ect on reputation leading to loss
of stakeholder trust and confi dence, material
adverse eff ect on the ability to attract and
retain third party brands, suppliers, designers,
concessionaires and franchisees with
subsequent impact on performance and results
Ethical sourcing, legislative change and corporate responsibility matters
are key areas of focus for the sustainability committee.
To ensure that Debenhams has the most current information available,
it is a member of relevant industry bodies that provide awareness of
changes to standards and legislation.
Debenhams is an active member of Ethical Trading Initiative (ETI) and
expects all suppliers to follow the ETI base code and adhere to Debenhams’
own supplier code of conduct.
A reliance on third party suppliers, the challenges of the current economic
environment and the complexity of new and existing legislation makes this
an ongoing risk which Debenhams and its suppliers have to manage.
Hazard
Risk and impact
Example of mitigation
Change*
Loss of business or additional
expenditure caused by terrorism,
strikes, riots, natural disasters
or pandemics
Adverse eff ect on inventory and gross
transaction value and will divert fi nancial
and management resources from more
benefi cial uses. In the case of terrorism,
customer confi dence may be impacted
The business continuity committee is comprised of senior executives and
works to a framework based on the most recent international standard.
The key objectives of this committee are to ensure that potential threats to
the organisation and the impacts that those threats might cause have been
identifi ed, that a framework that builds organisational resilience to known
threats is in place and that the framework has the capability to deliver an
eff ective response to safeguard the Group.
Insurance policies have been placed as appropriate to minimise the impact
of specifi c risks.
Additional expenditure or reputational
damage caused by changes in
legislation or a breach of regulations
Debenhams has specialist accounting, taxation and legal and secretariat
teams and is also a member of key industry bodies which provide
awareness of changes to standards and legislation.
Adverse eff ect on inventory and gross
transaction value and will divert fi nancial
and management resources from more
benefi cial uses
Forums exist to focus on specifi c areas of legislation. Specifi c business
policies and procedures are in place to ensure roles and responsibilities are
understood across the Group.
*Change in severity and/or likelihood of risk during course of 2012
Debenhams plc Annual Report and Accounts 2012 43
Risk review continued
Hazard continued
Risk and impact
Example of mitigation
Change*
Theft of customer data or breach
of payment card industry data
security standards
Negative eff ect on reputation leading
to loss of stakeholder trust and confi dence,
with subsequent impact on performance
and results and will divert fi nancial
and management resources from
more benefi cial uses
Personal injury or property damage
relating to a major Debenhams or
supplier location
Injury or loss of life to staff or customers.
Negative eff ect on reputation and will divert
fi nancial and management resources from
more benefi cial uses
Disruptions or other adverse events
aff ecting relationships with or the
performance of major suppliers,
franchise partners, store card providers,
designers or concessionaires
Costs associated with the transfer of
the operations or the potential of extra
operational cost from a new provider
Changes in exclusivity arrangements with
designers or any decline in their popularity
could have a material adverse impact
Loss of a number of important concession
partners may adversely aff ect GTV
Adverse events within the supply chain
could restrict the availability or signifi cantly
increase the cost of goods
Credit insurance diffi culties for a signifi cant
number of suppliers could lead to a
detrimental variation of terms or alternative
suppliers used to source some goods
Fraud, theft or industrial espionage
Negative eff ect on reputation and will divert
fi nancial and management resources from
more benefi cial uses
The information security forum reviews projects and key activities for
compliance to the relevant standards. Debenhams’ compliance to the
PCI standard is monitored by management and reported to the Audit
Committee. A number of security tools are employed to protect data,
including encryption, intruder detection and data loss prevention.
The executive health and safety committee reviews compliance in this area
and a number of participants are members of various relevant industry
bodies. The committee receives input from specialist teams which focus on
discrete aspects. These include health and safety, building services, insurance
and buying and merchandising. To support compliance and to maintain
high operational standards, health and safety awareness programmes are
in place and each site has its own health and safety committee.
In order to minimise the impact of any third party relationship or
performance issues, Debenhams’ objectives are to: maintain excellent third
party relationships by ensuring strategies are aligned; have appropriate,
unambiguous contracts in place; ensure third parties are fi nancially robust;
and have contingency plans in place in the event of a failure (e.g. conversion
of space to own bought for concessionaire failure, multiple sourcing routes
for supplier failure).
This is an increasing risk due to the ongoing, global economic situation
and the impact this could have on a signifi cant supplier or partner.
In order to mitigate fraud across all channels in which Debenhams
operates, a number of preventative measures are in place. These include
accounting policies and procedures, systems access restrictions,
expenditure authorisation levels, whistleblowing and anti-bribery and
corruption policies and a code of business conduct, all of which provide
employees with guidelines on how to escalate an issue confi dentially.
A variety of monitoring mechanisms are used to identify fraudulent
activity including data mining across point of sale and head offi ce
functions. As part of the organisation-wide risk assessment, individual
managers sign an anti-fraud, bribery and corruption declaration. Issues
identifi ed are investigated and reported to the Audit Committee.
*Change in severity and/or likelihood of risk during course of 2012
44 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Operational risk
Risk and impact
Failure to deliver a business
critical project
Divert fi nancial and management resources
from more benefi cial uses and signifi cantly
damage ability to manage information
technology systems
Example of mitigation
Change*
A full investment appraisal is conducted as part of the decision making
process and must be signed off by a board member before any project
is undertaken.
As part of project governance, a steering committee monitors all key areas
involved in the delivery of the project, a project framework is used, selected
projects will be reviewed by internal audit and post investment appraisals
are undertaken.
Debenhams is undertaking a head offi ce move during 2013 which
increases the risk rating compared to last year.
Ineff ective brand awareness
and marketing programmes
Loss of market share, customer loyalty,
reduction in gross transaction value and a
decline in sales on discretionary purchases
Debenhams utilises market, trend and customer awareness research to
understand current demands and preferences. This information is used to
identify specifi c segments of the market to target and to form a proposal as a
marketing campaign. A full investment appraisal is conducted and must be
signed off by a board member before any campaign is undertaken. Campaign
eff ectiveness is monitored through external feedback and internal analysis.
Risks associated with
leasehold properties
Signifi cant alterations in rental terms
could have a material adverse eff ect
on the business, as would failure to
secure desirable locations
Disputes over store modernisations may
lead to reinstatement costs and termination
of leases may lead to dilapidation costs
being incurred
Failure to manage asbestos in specifi c
properties may lead to fi nes or other liabilities
aff ecting Debenhams’ reputation and the full
or partial closure of properties
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.
Debenhams is also a member of key industry bodies which provide
awareness of changes to standards and legislation.
Debenhams consults with industry experts to ensure that the asbestos
policy and asbestos register are fully up to date. All locations where asbestos
has been identifi ed are clearly marked with signage and the condition is
checked on a regular basis with action taken in the event of any
deterioration. Any works undertaken in these areas are approved by both
the health and safety and building services teams prior to any work permits
being issued with specialist companies used as required.
Debenhams is undertaking a head offi ce move during 2013 which
increases the risk rating compared to last year.
Risks associated with systems
failure, external attack of systems
or data inaccuracy
Project governance, change control and implementation frameworks form
part of all project lifecycles and the IS management team is responsible for
ensuring that they are adhered to.
Divert fi nancial and management resources
from more benefi cial uses and signifi cantly
damage ability to manage information
technology systems
Inappropriate decisions could be made using
wrong or ambiguous information
Monitoring processes are in place across a number of key business
systems, alongside appropriately trained specialist teams and an internal
knowledge database.
Disaster recovery site is in place and associated systems are regularly tested
to ensure that invocation would work eff ectively if required.
This risk was previously included within other risks in this section but has
now been detailed separately, given the signifi cance of the risk should it occur.
Inability to eff ectively invoke
the Business Continuity Plan
The Business Continuity Committee is comprised of senior executives and
works to a framework based on the most recent international standard.
Unable to continue operations smoothly
in the event of a major incident
Divert fi nancial and management resources
from more benefi cial uses
The key objectives of this committee are to ensure that potential threats to
the organisation and the impacts that those threats might cause have been
identifi ed, that a framework that builds organisational resilience to known
threats is in place and that the framework has the capability for an eff ective
response to safeguard the Group.
Debenhams is undertaking a Head Offi ce move during 2013 which
increases the risk rating compared to last year.
This risk was previously included within other risks in this section but has now
been displayed separately, given the signifi cance of the risk should it occur.
*Change in severity and/or likelihood of risk during course of 2012
Debenhams plc Annual Report and Accounts 2012 45
Sustainability
We are committed to economic,
environmental and social sustainability
as an integral driver of long-term
business success.
Sustainability review p48
46 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Debenhams plc Annual Report and Accounts 2012 47
Sustainability review
Building the right future
Martina King, chair of sustainability
committee
Debenhams does not have a sustainability
department. For us, being environmentally
and socially responsible is embedded into
the business and into everyone’s role.
Our sustainability committee represents all
key areas of the business. Our experts in every
aspect of retail have a deep understanding of
the direct benefi ts we can introduce by adopting
sustainability measures.
For more information go to
sustainability.debenhamsplc.com
48 Debenhams plc Annual Report and Accounts 2012
Debenhams has been trading successfully
for over 200 years. Our ability to endure
is founded on our long history of acting
responsibly towards our stakeholders –
shareholders, suppliers, customers,
employees and local communities –
as well as the environment.
We do not have a dedicated sustainability
department and our sustainability
committee may be relatively new but
our practice of sustainability principles
is well established. The material issues
for our sustainability working groups –
ethical sustainable sourcing, logistics
and distribution, environment and people
– derive from Debenhams’ risk register,
which has been a foundation of our business
strategy for many years. The discipline
of annually updating the register has
created a culture where managers across
the business routinely seek to identify,
mitigate and eliminate risks.
Commercial drivers have always been
paramount. All managers review practices
regularly to ensure their area is operating
as eff ectively and effi ciently as possible.
Wherever possible, we seek economically
benefi cial measures with positive social
and environmental impacts.
A sounding board
Debenhams’ sustainability committee
brings together experts from all aspects
of retail – from sourcing and supply through
to stores, staff and sales. The committee
meets quarterly to update Debenhams’
sustainability chair Martina King on
progress towards our commitments.
The committee also acts as a forum for
new ideas amongst members and between
the diff erent working groups, leading to
increased collaboration across the business.
The advantage of embedding sustainability
into everyone’s role is that all decisions can
be practically implemented by the relevant
department heads.
Plan to endure
During 2012, the sustainability committee
has been very active on both a practical and
strategic level. Whilst working on targets set
for the year, we have also been developing
a longer-term sustainability plan.
We have now drawn up Debenhams’ “Plan
to Endure” (“P2E”), the aim of which is to
continue to grow and be here for the duration
by doing the right things for our stakeholders.
P2E entails driving overall business
performance while living up to our
responsibilities as a retailer, employer
and business partner, as a steward of
the environment and our shareholders’
investments and as a member of
the community.
In line with our business strategy to simplify
as much as possible, P2E consolidates the
work of our four internal working groups –
ethical sustainable sourcing, logistics and
distribution, environment and people – into
three main areas of focus which balance the
economic, environmental and social aspects
of sustainability.
Sustainable supply
Sustainable supply brings together the
commitments of our ethical sustainable
sourcing working group with relevant
elements of logistics and distribution –
namely, their objective to ensure our supply
chain is robust so that goods always fl ow.
Environmental responsibility
Our priorities for environmental
responsibility are climate change, energy and
waste. We aim to reduce our environmental
footprint through various initiatives
undertaken by the logistics and distribution
and environmental working groups.
Connecting with people
Our people working group is committed
to attracting, keeping and growing our
employees; to delivering the service,
standards and goods our customers expect
and to making a positive contribution to
local communities and national charities.
Sustainability reporting
Last year we committed to launching a
dedicated website as our principal method
of communication of sustainability issues.
This site is now live at sustainability.
debenhamsplc.com. Following on from
P2E, our sustainability website focuses
on the three areas of sustainable supply,
environmental responsibility and
connecting with people.
The aim of the website is to update
stakeholders regularly with news about our
sustainability progress as initiatives unfold
during the year. The new site is also home
to details of our sustainability approach,
our policies and key performance data for
the year. The following pages of this review
aim to highlight the progress Debenhams
has made on sustainability during 2012.
Supply highlights
The market has continued to be volatile in
terms of costs of cotton and other materials,
labour and shipping, but we were successful
in ensuring the continued supply of goods
during the year at the quality and value our
customers expect.
One trial that proved benefi cial was working
directly with mills supplying cotton, denim
and chinos. By consolidating orders across
internal divisions, we were able to negotiate
directly with mills to secure supplies at an
acceptable cost to us and our suppliers.
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
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Sustainability drivers
The material issues for Debenhams’
sustainability working groups derive from our
risk register. Commercial drivers have always
been paramount but wherever possible, we
seek economically benefi cial measures with
positive social and environmental impacts.
P2E
Our sustainability committee has been very
active on both a practical and strategic level.
While working on targets set for the year,
we have also been developing a longer-term
sustainability plan. We have now drawn
up Debenhams’ “Plan to Endure” (P2E).
Debenhams plc Annual Report and Accounts 2012 49
Sustainability review continued
Ethical supply
Energy effi ciency
50 Debenhams plc Annual Report and Accounts 2012
Our close relationship with suppliers also
ensured a sustained fl ow of goods from
China that avoided unpredictable labour that
traditionally follows the Chinese New Year
holiday. We talked to our suppliers to gauge
labour availability and understand how
many workers they expected to return.
By changing our critical path for menswear,
womenswear and childrenswear we made
sure our goods were produced earlier,
which gave us a competitive advantage.
In light of ongoing international shipping
issues, Debenhams’ policy to take direct
responsibility for shipping was also of
strategic and commercial benefi t. Our high
freight on board (“FOB”) policy delivers
improved speed, cost and visibility further
up the supply chain. We know instantly
where and when problems occur and,
where necessary, can switch supplies to
another country to ensure continued supply.
We used diff erent shipping lines to spread
risk and improved logistics planning to
achieve increased loads and greater cost
eff ectiveness per container. We also achieved
our lowest ever demurrage charges.
Environmental progress
As well as complying with all mandatory
requirements, we believe there is a very
strong and valid business case for being
environmentally responsible. Reducing
our use of resources and our production
of waste will result in lower overheads and
improve our ability to endure economically.
Our 2012 environmental activities have
contributed towards this.
We participate in the UK government’s CRC
Energy Effi ciency Scheme and have been
reporting greenhouse gas (“GHG”) emissions
online to the Carbon Disclosure Project
(“CDP”) for the past three years. Our latest
CDP submission – for the year ended August
2011 – shows that our overall emissions grew
by 6%, while like-for-like emissions based on
fl oorspace reduced by 2%.
The increase in overall emissions is due to
our increased scope and improved methods
of reporting, including data for our operations
in Denmark as well as new calculation
methods. We reduced our like-for-like
consumption of purchased energy through
a combination of monitoring and targeting
of store energy, staff awareness, training
and bonus incentives as well as technical
support and energy effi ciency investments.
We appointed New Star Environmental as
our new store waste contractor in March
2012. New Star understands our business
and the diff erent operational needs of our
stores. On our behalf, they manage contracts
with a number of regional suppliers to ensure
the most fl exible and eco-effi cient solutions
Debenhams has been a member of the
Ethical Trading Initiative (“ETI”) since 2001.
All our suppliers must sign our Code of
Conduct, based on the ETI Base Code.
Every supplier and factory undergoes
regular social, ethical and technical auditing.
Our Code of Conduct lays out an number
of labour rights principles, for example, that
no child labour is used, no discrimination
is practised, correct wages are paid and
product safety standards are adhered to.
SGS are our nominated global partner for
social, ethical and technical audits. In 2012,
the monitoring programme covered 99%
of our total manufacturing base.
We have also continued with random
unannounced visits, fi rst initiated in 2011.
As well as monitoring compliance, we
engage fi rst-hand with our manufacturers,
giving us fi rst-hand insight into local social
and economic pressures, how factories are
responding and what we need to do to work
collectively together for positive remediation.
Energy effi ciency is a key component of our
continuing store modernisation programme.
We are investing a total of £1.2 million in
lighting, heating, ventilation and air
conditioning control projects which will
reduce energy consumption while improving
the store environment for customers.
We know that energy use increases when
store modernisation is carried out overnight
and we will carefully review energy
consumption for all stores that have been
modernised this year, but initial results
are very encouraging.
For example, trials replacing lights with
energy effi cient lamps in the Scarborough
and White Rose stores achieved like-for-like
savings of 37% and 31% respectively.
Reducing the voltage in Swindon reduced
energy consumption between 8 and 13%
and saved £14,000. To date, such measures
have saved nearly £400,000 on energy
across the business and we are on track to
see a full return on our investment within
four years.
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
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We now have a calendar of support for these
charities that encourages individual stores
to fundraise in their preferred style. Stores
also have the freedom to support local
causes during other times of the year.
The Debenhams Foundation (number
1147682) was formally registered with the
Charity Commission on 13 June 2012.
All funds raised for charity will go through
the Foundation, providing improved
transparency and accountability. Nikki
Zamblera, HR Director, is chair of the trustees
who include former Debenhams’ senior
managers, Pat Skinner and Keith Markham.
Our future plans
During 2013 we plan to progress many
initiatives that will contribute towards
Debenhams’ sustainability goals.
In supply, we will be undertaking trials for
sourcing merchandise closer to home in
Europe. We will also progress trials to ship
merchandise directly from the country of
manufacture to our international franchisees.
We expect further improvements through
our waste management contracts and to
see environmental and economic benefi ts
of our investments in store modernisation
and our upgraded distribution fl eet.
Our new employee and customer surveys
should give us more relevant information
about ways to improve people’s experience
of Debenhams. We also look forward to
our head offi ce move in 2013.
Updates on all activities will be posted
on our dedicated sustainability website:
sustainability.debenhamsplc.com.
are available to us. A full year review will be
carried out in April, but initial fi gures indicate
that we are now sending far less to landfi ll,
resulting in signifi cant fi nancial savings.
Connecting with people
Customers are at the heart of our decision
making. Delivering on our customer promise
relies on the commitment of our 30,000
employees so we remain committed
to attracting, retaining and growing
the very best talent in the industry.
We created 168 new jobs during 2012
through the opening of two new stores in
Newbury and Dumfries. We also worked
in partnership with Capita to open a new
customer call centre in Leeds.
We continued our policy to appoint the
majority of store and head offi ce managers
internally. Over the 12 months to the
end of September 2012, 89% of retail
management appointments and 69%
of senior executive appointments at
head offi ce were internal promotions.
Debenhams Design Team remains the
key vehicle for quantitative feedback from
customers. 15,000 registered customers
participate in regular surveys to provide
opinions on initiatives such as advertising,
branding, charity involvement and store
modernisation. We use this feedback to
infl uence decision making throughout
the business.
Our Customer Closeness programme has
proved extremely valuable for qualitative
feedback. Our Chief Executive Michael Sharp
and other senior executives spend a day in
store each quarter gaining insights directly
from customers and non-customers.
Our long tradition of connecting with local
communities and supporting good causes
became more strategic during 2012. Following
feedback from our customers and employees,
we have formed national partnerships with
BBC Children in Need, NSPCC, Breakthrough
Breast Cancer, Breast Cancer Campaign,
Pink Ribbon Foundation and Movember.
Customer confi dence
Debenhams’ long-running Inclusivity
Campaign was honoured with the
Campaign for Body Confi dence Retail
Award in April 2012. The judges believe the
campaign “showcases imagery that is
inspirational and realistic by using models
who are older, curvier and visually disabled
to inspire modern day British women”.
For us, using models, mannequins and
photography that customers can identify
with is about more than taking a socially
responsible stance. Inclusivity is a business
decision that makes commercial sense
because it appeals to a wider audience.
Debenhams also supports the UK All-Party
Parliamentary Group on Body Image; we are
a signatory to the British Retail Consortium
guidelines on responsible marketing to
children and the Mumsnet Let Girls be
Girls campaign. Campaigns like this are
important for sustaining consumer trust
and confi dence.
Debenhams plc Annual Report and Accounts 2012 51
Governance
This section explains the board’s
approach to corporate governance
and corporate responsibility.
Chairman’s introduction p55
Board of directors p56
Corporate governance report p58
Directors’ report p63
Remuneration report p66
For more information go to
ar12.debenhamsplc.com
52 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
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Debenhams plc Annual Report and Accounts 2012 53
Quick reference guide
to the contents of the Governance section
p55
p56
p58
p58
p55
p56 to 57
p59 & p64
p59
Chairman’s introduction
Statement of compliance with the UK Corporate
p55
Governance Code
Re-election of directors
Board of directors
Principal committees of the board
Role of the board
The Chairman and Chief Executive
p59
Senior Independent Director
p59
Performance evaluation
Directors’ indemnities
Directors’ confl icts of interest
p60
Auditor independence
Relations with shareholders
Major shareholdings
Share capital
Annual General Meeting
Remuneration policy for executive directors
Summary of executive directors’ remuneration
Summary of bonus schemes
Remuneration of non-executive directors
p72
Performance graph
Directors’ shareholdings
Directors’ emoluments
p74
Pension
p74
Directors’ interests in share plans
Statement of directors’ responsibilities
p76
Auditors’ report
p68 to 69
p63 to 64
p60
p65
p63
p72
p73
p73
p75
p67
p68
Committee letters
Nomination Committee
p62
Audit Committee
Remuneration Committee
p61
p66
For more information go to
ar12.debenhamsplc.com
54 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
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about on page 24) and, as one of the leading
experts in his fi eld, we look forward to Peter’s
contribution as a member of the board.
In accordance with the Listing Rules of the
UK Listing Authority, I confi rm, on behalf
of the Company, that throughout the year
ended 1 September 2012 and as at the date
of this Annual Report, it was compliant
with all the relevant provisions as set out in
the UK Corporate Governance Code issued
by the Financial Reporting Council.
As with last year, all the directors will submit
themselves for re-election at the Annual
General Meeting in January 2013. Peter
Fitzgerald will stand for election having been
appointed to the board on 4 October 2012.
Biographies for the members of the board
can be found on pages 56 and 57 of this
Annual Report.
Details of the Annual General Meeting itself
are enclosed with this report. The board and
I look forward to meeting with shareholders
in January.
Nigel Northridge
Chairman
Chairman’s introduction to governance
Good governance is about
responsible and eff ective
management of the
business in a way which
demonstrates honesty,
transparency and
accountability.
Dear shareholder
On behalf of the board, I am pleased to
present the Corporate Governance Report for
the fi nancial year ended 1 September 2012.
At Debenhams we remain committed to
high standards of corporate governance.
We believe this is central to the continued
strong performance of the Group in a manner
which is sustainable over the long-term
and to maintaining the confi dence of our
shareholders. For us, good governance is
about responsible and eff ective management
of the business in a way which demonstrates
honesty, transparency and accountability.
In this report we set out how the board and
its committees are structured and what they
have done during the year.
The board has the ultimate responsibility
for the Group’s performance and for
overseeing the management of risk.
As such, it is right that shareholders look
to us to promote the long-term success of
Debenhams. As Chairman, it is my role to
provide the leadership to enable the board
to do this eff ectively. This year I therefore
personally conducted the board evaluation
process. You can fi nd more details on this
process and its outcome on page 59 of this
report and I confi rm that all of the directors
continue to perform eff ectively and to
demonstrate commitment to their roles.
There have been several changes to the
board composition over the past year.
Most notably, Michael Sharp was appointed
Chief Executive on 4 September 2011. Simon
Herrick took up the role of Chief Financial
Offi cer on 10 January 2012, replacing Chris
Woodhouse. Adam Crozier stepped down
from the board on 1 September 2012.
Subsequent to the year end, on 4 October
2012 we announced the appointment of
Peter Fitzgerald as a non-executive director.
Peter has a wealth of experience in helping
retail businesses to realise their online
ambitions with acknowledged industry-
leaders Amazon and Google. Growing our
multi-channel business is a crucial part of
Debenhams’ strategy (which you can read
Management structure
Michael Sharp
Chief Executive
Simon Herrick
Chief Financial Officer
Suzanne Harlow
Group Trading Director
Mike Goring
Retail Director
Richard Cristofoli
Marketing Director
Nikki Zamblera
HR Director
Financial reporting and
management, tax, treasury,
legal, internal audit, investor
relations, systems and logistics
Design, buying, merchandising,
distribution, sourcing, supply
chain and external business
UK and international store
operations and store
development
Product marketing, advertising,
PR, visual and creative, strategy
and insight
Pay & reward, learning &
development, pensions
and facilities
Debenhams plc Annual Report and Accounts 2012 55
Board of directors
Composition of the board
Directors
Executive
Non-executive
No.
2
6
Length of tenure
of directors
Directors
Less than one year
One to three years
Three to six years
More than six years
No.
2
2
2
2
Committees
Nomination Committee
The Nomination Committee is responsible for
board recruitment and succession planning,
thereby ensuring that the right skill sets are
present in the boardroom.
Remuneration Committee
The Remuneration Committee is responsible
for determining all elements of remuneration
for the executive directors and for reviewing
the appropriateness and relevance of the
Group’s remuneration policy.
Audit Committee
The Committee’s primary responsibilities are
to monitor the integrity of the Group’s financial
statements, to review external and internal audit
activity and to review and monitor the effectiveness
of risk management and internal controls.
Sustainability committee
Although not a formal board committee, the
sustainability committee was created by order
of the board to ensure the Group’s activities
promote the interests of all its stakeholders.
56 Debenhams plc Annual Report and Accounts 2012
Nigel Northridge (56)
Term of offi ce Chairman since April
2010 following appointment as a member
of the board in January 2010
Experience Nigel Northridge is currently
Chairman of Paddy Power plc and a
non-executive director of Inchcape plc.
He also chairs the remuneration
committee at Inchcape plc. Previously
he was senior independent director of
Aggreko plc, chief executive of Gallaher
Group plc and a non-executive director
of Thomas Cook Group plc.
Committee membership
Nomination (chairman), Remuneration
Other directorships
Paddy Power plc
Inchcape plc
Michael Sharp (55)
Term of offi ce Chief Executive of
Debenhams plc since September 2011,
Deputy Chief Executive from November
2008 and Chief Operating Offi cer from
May 2006
Experience From 1997 to 2004,
Michael Sharp was Trading Director of
Debenhams Limited and from January
2004 to May 2006 he was its Chief
Operating Offi cer. He previously worked
in various capacities within the Burton
Group, including as Managing Director
of Principles and Racing Green and
Buying and Merchandising Director
of Topshop and Topman.
Committee membership
None
Other directorships
None
Simon Herrick ACA (49)
Term of offi ce Chief Financial Offi cer
since January 2012 following
appointment as a member of the board
in November 2011
Experience Simon Herrick was formerly
Group Finance Director and subsequently
Acting Chief Executive Offi cer of
Northern Foods PLC. He is a former
Finance Director of Kesa Electricals PLC
and PA Consulting. He has also held
senior roles at Regus PLC, Hays PLC
and PepsiCo.
Committee membership
None
Other directorships
None
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Peter Fitzgerald (42)
Term of offi ce Independent non-
executive director since October 2012
Experience Peter Fitzgerald is Country
Sales Director for Google UK/Eire having
worked for that business since 2007,
predominantly with retail business
clients. Previously he worked for Amazon
both in Europe and the USA.
Committee membership
Audit
Other directorships
None
Debenhams plc Annual Report and Accounts 2012 57
Dennis Millard CA (SA) (63)
Term of offi ce Senior Independent
Director since May 2010 following
appointment as an independent
non-executive director in May 2006
Experience Dennis Millard is currently
Chairman of Halfords Group plc having
acted as interim Executive Chairman
from July to October 2012. He is also
Chairman of Smiths News plc and a
non-executive director of Premier Farnell
plc. His former appointments include
Group Finance Director of Cookson Group
plc and non-executive director of Exel plc,
Arc International and EAG Ltd and
Xchanging PLC.
Committee membership
Remuneration (chairman),
Nomination, Audit
Other directorships
Halfords Group plc
Premier Farnell plc
Smiths News plc
Martina King (51)
Term of offi ce Independent non-
executive director since August 2009
Experience Former Managing Director
of Aurasma, Martina King has an
extensive career in media technology.
Her previous roles include Managing
Director of Capital Radio and Managing
Director for Europe at Yahoo! where she
rebuilt the UK and Ireland business after
the dot com collapse and subsequently
led the rebuilding of the European
division. Ms King is also a non-executive
director of Capita plc and Cineworld plc.
Committee membership
Remuneration, Nomination, Audit,
chair of sustainability committee
(a committee of the board)
Other directorships
Capita plc
Cineworld plc
Mark Rolfe FCA (53)
Term of offi ce Independent non-
executive director since October 2010
Experience Mark Rolfe is currently
a non-executive director of Barratt
Developments plc, Hornby plc and
The Sage Group plc. He is also Chairman
of Lane, Clark & Peacock LLP. Mr Rolfe
previously worked in various fi nance
and executive roles within Gallaher
Group plc including as Finance Director
for seven years until the company was
acquired in 2007.
Committee membership
Remuneration, Nomination,
Audit (chairman)
Other directorships
Barratt Developments plc
Hornby plc
The Sage Group plc
Sophie Turner Laing (52)
Term of offi ce Independent non-
executive director since August 2009
Experience Sophie Turner Laing
is currently Managing Director,
Entertainment, News and Broadcast
Operations at British Sky Broadcasting
Group plc and on the board of AETN
UK and NGC Network International LLC.
In addition, she is Vice President of BAFTA
and a trustee of The Media Trust and
the National Film and TV School.
Her previous roles include Controller,
Programme Acquisition at the BBC and
Vice-President, Broadcasting at Flextech
(now Virgin Media Television). Ms Turner
Laing was also Co-founder and Managing
Director of HIT Entertainment.
Committee membership
Remuneration, Nomination, Audit
Other directorships
AETN UK
NGC Network International LLC
Corporate governance report
Gender ratios
Main board
Male
Female
No.
6
2
Executive committee
Male
Female
No.
4
2
Senior management team No.
65
Male
50
Female
Role of the board
The board of Debenhams is collectively
responsible for the long-term success of
the Company and is ultimately accountable
for the Group’s strategy, risk management
and performance.
Following the retirement of Adam Crozier
from the board on 1 September 2012, at the
end of the year the board of Debenhams plc
comprised the non-executive Chairman,
two executive directors and four independent
non-executive directors. Peter Fitzgerald
was subsequently appointed as an
independent non-executive director
on 4 October 2012. Dennis Millard
is the Senior Independent Director.
Debenhams has 25% female representation
on the board. Women account for one third
of the executive committee and 43% of the
senior management team.
The board held fi ve meetings during 2012
which were fully attended by all the board
members apart from the meeting on 12 April
2012 which Adam Crozier was unable to
attend due to a schedule clash. In addition to
the directors, board meetings were attended
by the Retail Director, the HR Director,
the Group Trading Director, the Marketing
Director and the Company Secretary. The
board also held its annual off -site meeting
in February to consider the Company’s
strategy. No individual or small group of
individuals dominates the board’s decision-
making process.
In accordance with the UK Corporate
Governance Code, there is a formal schedule
of matters reserved for the board’s decision
which is monitored by the Company
Secretary and reviewed annually by the board.
Specifi c matters reserved for the board’s
consideration include: the approval of the
Company’s business model and strategy;
determination of the level of risk the Company
is willing to take in achieving the Company’s
strategic and operational plans, approval of
the Company’s Financial Statements; major
capital expenditure; major acquisitions and
disposals; approval of changes to governance
and business policies; and a review of the
eff ectiveness of the board and its committees.
The board delegates the operational decisions
for the implementation of these matters to
the Company’s management.
Reports from the executive directors are
circulated in advance of each board meeting
and they focus on major operational matters.
Reports are also produced by specialists on
general and Company business areas and
by other executives and external advisers
on key business areas. Various sectors of the
business present to the board on a rotating
basis. During last year these overviews were
presented by menswear, womenswear,
home and childrenswear. In 2012 other
matters considered by the board included
presentations from marketing and PR,
investor relations, taxation, health and safety,
human resources, approval of the annual
budget and the fi ve year plan, assessment
of the corporate risk map and a review of
governance issues aff ecting the Company.
The Chairman and the Chief Executive
There are clear divisions of responsibilities
between the Chairman and the Chief
Executive and these are set out in writing
and agreed by the board.
The main responsibility of the Chairman is
the eff ective running of the board, ensuring
that the board as a whole plays a full and
constructive part in the development and
determination of the Company’s strategy and
its overall commercial objectives. He ensures
that the board determines the nature and
extent of the signifi cant risks the Company is
willing to embrace in the implementation of
its strategy. The Chairman is responsible for
promoting the highest standards of integrity,
Board activity throughout the year
1
1
0
2
r
e
b
m
e
t
p
e
S
1
1
0
2
r
e
b
o
t
c
O
2
1
0
2
y
r
a
u
n
a
J
2
1
0
2
y
r
a
u
r
b
e
F
Received an update on
Health and Safety within
the business
Approved budget for
fi nancial year
Received an overview of
menswear performance
Approved full year results,
report and accounts and
recommended the fi nal
dividend
Received an overview
of womenswear
performance
Met with shareholders
at the Annual General
Meeting
Annual Strategy Meeting
2
1
0
2
l
i
r
p
A
2
1
0
2
e
n
u
J
Received an overview
of childrenswear
performance
Received an overview of
home performance
Review of fi ve year plan
Approval of interim
results and resolved to
pay interim dividend
Reviewed the annual
performance evaluation
of the board and its
committees
Debated and approved
the Corporate Risk Map
58 Debenhams plc Annual Report and Accounts 2012
probity and corporate governance
throughout the Company. The Chairman
also manages the relationship and
communication with the shareholders of
the Company in relation to any governance
matters. He takes the lead on issues of
director development through induction
programmes and regular reviews. By
chairing the Nomination Committee he
regularly considers succession planning
and the composition of the board.
The Chairman sets the board agenda.
Together with the Company Secretary, he
ensures that the members of the board and
its committees receive clear, comprehensive,
up-to-date and timely information so that
there can be thorough consideration of the
issues prior to, and informed debate and
challenge, at board and committee meetings.
Where directors have not been able to attend
meetings due to confl icts in their schedule,
they receive and read the papers for
consideration at that meeting, relaying any
comments to the Chairman in advance
of the meeting where possible.
The Chief Executive is responsible for all
executive management matters aff ecting the
Company. His principal responsibility is the
day-to-day running of the Company business
and the achievement of the agreed strategic
objectives. The management structure of
the Company under the Chief Executive’s
leadership is shown on page 55.
The Company Secretary
The Company Secretary reports to the
Chairman on all board governance matters.
All directors have access to the services of the
Company Secretary and may take independent
professional advice at the Company’s
expense in conducting their duties.
Indemnifi cation of directors
Qualifying third party indemnity provisions
(as defi ned in section 234 of the Companies
Act 2006) are in force for the benefi t of the
directors who held offi ce during the year.
The Company also provides insurance cover
for its directors.
Directors’ confl icts of interest
The Nomination Committee annually
reviews and considers the interests and other
external appointments held by the members
of the board . All confl icts declared were
approved at its meeting in September 2012.
The directors have a continuing duty to
inform the board of any potential confl icts
immediately so that such confl icts may
be considered and if authorised included
within the register of confl icts.
The Senior Independent Director
Dennis Millard provides a sounding board for
the Chairman and serves as an intermediary
for the other directors as necessary. The
Senior Independent Director also acts as
a line of contact for shareholders if they
have concerns which are not appropriate
for discussion through the Chairman,
Chief Executive or Chief Financial Offi cer.
Length of service for each non-executive director
Name
Nigel Northridge
Peter Fitzgerald
Martina King
Dennis Millard
Mark Rolfe
Sophie Turner Laing
Date of appointment
1 January 2010
4 October 2012
1 August 2009
9 May 2006
1 October 2010
1 August 2009
Date of last re-election by
shareholders
10 January 2012
n/a
10 January 2012
10 January 2012
10 January 2012
10 January 2012
Current length of
service as a non-
executive director
at year end
2 years 8 months
n/a
3 years 1 month
6 years 4 months
1 year 11 months
3 years 1 month
Chairman’s responsibilities
Chief Executive’s responsibilities
• Leading the board, ensuring the
directors receive accurate and timely
information to enable debate and high
quality decision making
• Promoting high standards
of corporate governance
• Accountable to shareholders for the
eff ectiveness of the board
• Ensuring, as Chairman of the
Nomination Committee, that there are
board succession plans in place in order
to retain and build an eff ective and
complementary board
• Developing business strategies
and commercial objectives for
board approval
• Successfully implementing the
business strategy
• Regularly updating the board on
progress against approved plans
• Ensuring that the Executive Committee
complies with all business policies,
delegated authorities and regulations in
achieving the objectives of the business
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Non-executive directors
All the non-executive directors are considered
by the board to be independent and free
from any relationship or circumstances that
could aff ect their independent judgement.
They have a wide range of skills and
experience and provide constructive
challenge in the boardroom.
The table below details the length of service
for each non-executive director.
The letters of appointment for the non-
executive directors set out the time
commitment expected to be necessary for
the performance of their duties. Routinely,
the expected number of days required for
each non-executive director is ten days.
Debenhams plc recognises that the
non-executive directors have other business
interests outside of the Company and that
other directorships bring benefi ts to the
board. All existing directorships are detailed
within the director biographies on pages 56
and 57. Non-executive directors are required
to obtain the approval of the Chairman
before accepting any further appointments.
Performance evaluation
In 2011 the performance evaluation was
facilitated by Lintstock Ltd. This year an
evaluation of the performance of the board,
its committees, the individual directors and
the Chairman was conducted internally. This
was led by the Chairman who interviewed all
board members individually and discussed
the results collectively with the board. The
conclusion was that the board is operating
eff ectively with plenty of energy around the
table. The overviews presented to the board
by the various parts of the business are
proving extremely valuable. The board
agreed to focus on further rationalisation
of materials it receives. In addition, the
non-executive directors evaluated the
Chairman’s performance at a meeting
chaired by the Senior Independent Director.
Debenhams plc Annual Report and Accounts 2012 59
Corporate governance report continued
Board committees
The board committees are the Audit,
Remuneration and Nomination Committees.
The terms of reference (which are reviewed
annually) of each committee can be found
at www.debenhamsplc.com. The members
and the role of each committee are disclosed
on pages 56 and 57 of this report.
In 2011 the board formed the sustainability
committee, a committee of the board
whose aim is to embed the corporate social
responsibility of the business within its
operations. The sustainability committee
is chaired by Martina King and its members
are employees whose roles within the
business fall within four key work streams,
namely sustainable sourcing, environment,
logistics & distribution and people. Further
information on the role, operation and
achievements of that committee can be
found on pages 48 to 51 and on our dedicated
website sustainability.debenhamsplc.com.
Share capital and control
Information which the directors are required
to provide pursuant to section 992 of the
Companies Act 2006 can be found on pages
63 and 64 of the Directors’ Report.
Auditor independence
In order to ensure that an appropriate
relationship is maintained with the external
auditors, a policy on auditor independence
has been established and is regularly
reviewed. This covers matters such as that
auditors and their staff should have no family,
fi nancial, employment, investment or
business relationship with the Company,
the employment by the Company of former
audit employees, the rotation of audit
partners and the provision of non-audit
services. The Audit Committee makes
recommendations to the full board in respect
of re-appointment annually of the auditors
and the board then ensures that this is
included on the notice for the Annual
General Meeting. As regards the risk of the
external auditors’ withdrawal from the
market, the Company considers that there
are suffi cient other auditors in the market
place should this situation ever arise.
The objective of the Audit Committee’s policy
in relation to the provision of non-audit
services by the auditors is to ensure that the
provision of such services does not impair the
external auditors’ independence or objectivity.
An independent report is produced by the
Debenhams fi nance team each quarter during
the year detailing all non-audit work, its cost,
when it was carried out and who instructed
it. This information is reported to the Audit
Committee at each meeting.
The Company’s policy identifi es three
categories of accounting services. The fi rst
category is audit-related services which the
auditors are permitted to provide. The second
category is prohibited services which the
auditors are not permitted to provide.
Prohibited services are those which might
result in the external auditors auditing their
own work or making management decisions
for the Company and those where some
mutuality of interest is created or where the
external auditors are put in the role of
advocate for the Company. The third category
is “potential” services which the auditors may,
in certain circumstances, provide subject to
compliance with the independence policy.
These services include tax advisory services
or services where the auditors are acting as
the Company’s reporting accountant.
£0.1 million was paid by the Company to
PricewaterhouseCoopers LLP for non-audit
services in respect of advisory services.
The audit fees paid by the pension schemes
were £38,000.
Relations with shareholders
The board is responsible for ensuring that the
Company maintains a satisfactory dialogue
with shareholders. The Chairman and the
Senior Independent Director are always
available to major shareholders. Formal
trading updates are given to the market
on six occasions during the year. Following
each of these announcements, conference
calls are held with shareholders and analysts
and after the full year and interim results
a presentation is made to the shareholders
and analysts. Analysts or brokers’ briefi ngs
are circulated to the board.
A programme of meetings and conference
calls is organised at appropriate times during
the year at which the Chief Executive,
Chief Financial Offi cer and Director of
Investor Relations discuss Company
performance and respond to any issues
raised by shareholders. During 2012 such
meetings were held in the UK, France,
Germany, Spain, Denmark, Sweden,
Switzerland and the USA.
A series of events is being held to provide
shareholders with a greater understanding
of each of the four pillars of the strategy.
Formal feedback from shareholders is sought
through an independently conducted
shareholder perception study which this
year took place in February 2012. The results
of this study were presented to the board.
60 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Nomination Committee:
Main activities during the year
• Conducted a review of the board size
and composition and the composition
of the committees of the board following
the new executive director appointment
and the resignation of an existing
non-executive director
• Reviewed the time commitment and
length of service of the Chairman and
each non-executive director
• Monitored directors’ confl icts of interest
• Members participated in an annual
board evaluation
• Reviewed its terms of reference
Nomination Committee
Dear shareholder
Martina King, Dennis Millard, Mark Rolfe, Sophie Turner Laing and I form your
Company’s Nomination Committee. Other individuals including the Chief
Executive, the HR Director and external advisors may be invited to attend for
all or part of any meeting, as and when appropriate. The Company Secretary also
attends meetings in his capacity as Secretary of the Committee. The Committee
met twice formally during the year.
This year we have seen several changes to our board composition. Michael Sharp took over
leadership of the business in September 2011, Simon Herrick assumed the position of Chief
Financial Offi cer in January this year following the departure of Chris Woodhouse, our
former Finance Director, and Adam Crozier stepped down from the board on 1 September
2012 having served just over six years as an independent non-executive director.
The recruitment process for the appointment of Simon Herrick was facilitated by external
search consultants Egon Zehnder. They identifi ed possible candidates for the position and
provided a shortlist for consideration by the Nomination Committee. These candidates
met with the majority of the board members before a recommendation was made by the
Committee. Both in its recruitment and succession planning processes, the Committee
takes into account the board size, structure and composition having regard to the balance
of skills, knowledge, experience and diversity of psychological type, background and
gender so as to ensure that the board is not composed of solely like-minded individuals.
The Committee’s key focus this year has therefore been on succession planning to ensure
that the right skill sets are present in the boardroom to support the Chief Executive’s
strategic plan.
As last year, in line with the UK Corporate Governance Code, the Nomination Committee
is recommending that all the directors of the Company stand for re-election at the next
Annual General Meeting.
Nigel Northridge
Chairman, Nomination Committee
Directors
Nigel Northridge
(Committee chairman) Chairman
Position
Adam Crozier (resigned
1 September 2012)
Martina King
Dennis Millard
Mark Rolfe
Sophie Turner Laing
Independent non-executive director
Independent non-executive director
Senior independent director
Independent non-executive director
Independent non-executive director
Number of meetings held
and attended during the year
2/2
2/2
2/2
2/2
2/2
2/2
Debenhams plc Annual Report and Accounts 2012 61
Corporate governance report continued
Audit Committee
Dear shareholder
As the new chairman of the Audit Committee, I am joined by Martina King,
Dennis Millard and Sophie Turner Laing to form your Company’s Audit Committee.
The meetings of the Audit Committee are also attended by the Chairman, the Chief
Financial Offi cer, the Director of Internal Audit and Risk Management and the external
auditors, PricewaterhouseCoopers LLP. The Treasurer and the Head of Tax make an
annual presentation to the Committee. The Company Secretary attends all meetings in
his capacity as Secretary of the Committee but also reports on any material litigation and
corporate governance issues. The business experience of the members of the Committee
is enhanced by the considerable fi nancial and accounting experience of Dennis Millard
and by my own fi nancial and accounting background.
The Committee met three times during the year and also met with the Company’s
auditors and the Director of Internal Audit and Risk Management privately without any
management being present. After each meeting, the chairman reports to the board on
the matters discussed, on recommendations and on actions to be taken.
Our responsibilities
The Audit Committee’s primary responsibilities are to monitor the integrity of Financial
Statements (including any related information presented with the Financial Statements)
and any formal announcements relating to the Company’s fi nancial performance,
to review any changes in accounting principles and consider the appropriateness of
accounting policies adopted by the Company, to review the Group’s internal and external
audit activity and to review and monitor the eff ectiveness of the risk management and
internal control systems within the business.
External auditors’ appointment
The Committee has primary responsibility for making a recommendation to shareholders
on the appointment, re-appointment and removal of the external auditors by annually
assessing the expertise, resources and independence of the external auditors and the
eff ectiveness of the audit process. PricewaterhouseCoopers LLP has served as auditors
of the Company since fl otation in May 2006, with their performance being reviewed
annually. Having considered the external auditors’ performance, resources, independence
and objectivity, the Committee has recommended to the board the re-election of the
auditors for 2013.
The external auditors are required to rotate the audit engagement partner every
fi ve years. The current audit partner commenced his engagement in August 2009.
The external auditor independence policy sets out the guidelines for engaging
PricewaterhouseCoopers LLP to provide non-audit services and a report is provided
to each Committee meeting detailing the services and fees for all non-audit services
for consideration by the Committee.
Mark Rolfe
Chairman, Audit Committee
Directors
Mark Rolfe (appointed Committee
Chairman on 1 September 2012)
Adam Crozier
(resigned 1 September 2012)
Peter Fitzgerald
Martina King
Dennis Millard (resigned as Committee
Chairman on 1 September 2012)
Sophie Turner Laing
Position
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
Independent non-
executive director
Senior independent
director
Independent non-
executive director
Number of meetings held
and attended during the year
3/3
2/3
0/0
3/3
3/3
3/3
Audit Committee:
Main activities during the year
• Reviewed all Financial Statements
released by the Company
• Monitored the eff ectiveness of the
system of internal controls and risk
management
• Created a business continuity
committee
• Approved the internal audit plan
• Approved the external auditors’
plan and fees
• Reviewed its terms of reference
62 Debenhams plc Annual Report and Accounts 2012
Directors’ report
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
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75
Principal activities
Debenhams is a leading international,
multi-channel brand which traded from
239 stores across 28 countries at the end
of 2012. Of these, Debenhams owns
171 stores with a combined trading space of
c.12.5 million sq ft. The brand is also available
online in 67 countries. Customers can also
shop through mobile devices, catalogues
and by telephone. Debenhams gives its
customers a unique, diff erentiated and
exclusive mix of own brands, international
brands and concessions.
A detailed review of the business of the
Group during the fi nancial year ended
1 September 2012, including an analysis of
the position of the Group at the end of the
fi nancial year, the trends and factors likely to
aff ect the future development, performance
and position of the business and a description
of the principal risks and uncertainties the
Group faces constitutes the business review
and are therefore incorporated into this
report by reference. Information about
environmental matters, employees and
social and community issues appear on
pages 48 to 51 and on the Company’s
dedicated sustainability website
sustainability.debenhamsplc.com.
Any liability is restricted to the extent
prescribed by the Companies Act 2006.
Events since the year end
Since the year end Debenhams has:
• Appointed Peter Fitzgerald as an
independent non-executive director
• Opened a store in Chesterfi eld
• Opened international franchise stores
in Indonesia, Georgia and Abu Dhabi
Profi t and dividends
The profi t after tax for the fi nancial year
ending 1 September 2012 was £125.3 million
(2011: £117.2 million). The directors
recommend the payment of a fi nal dividend
of 2.3 pence per ordinary share, to be paid on
11 January 2013 to members on the register
at the close of business on 7 December 2012.
This, together with the interim dividend of
1.0 pence per share paid in July, gives a full
year dividend of 3.3 pence per share.
Share buy-back programme
The Company announced on 20 October
2011 that it intended to return funds to
shareholders through a programme of share
repurchases once leverage neared 1.0 times
EBITDA. At the January 2012 Annual General
Meeting shareholders authorised the
Company to purchase up to 128,680,629
ordinary shares in the market. On 24 April
2012 a share repurchase programme
commenced and in the period 24 April 2012
to 7 August 2012, 23.6 million ordinary shares
of 0.01p each were purchased at a cost of
£20.1 million. All shares purchased by the
Company are currently held as treasury
shares. Approval will be sought from
shareholders at the forthcoming Annual
General Meeting to renew the annual
authority to purchase its own shares.
It is the board’s intention to purchase up to
£40 million of shares in the next 12 months.
Share capital and control
The issued share capital of the Company and
the number of shares held in treasury as at
1 September 2012 are shown in note 27 to the
Financial Statements on page 112. In addition
to the shares trading on the London Stock
Exchange, the Company operates a Level 1
Interests in voting rights
In accordance with Listing Rule 9.8.6(2), the following investor interests have been disclosed
to the Company pursuant to the Disclosure and Transparency Rules:
As at 1 September 2012:
Shareholder
Schroders plc
Bestinver Gestion, S.A. SGIIC
Milestone Resources Group Ltd
Morton Holdings , Inc
Legal & General Group plc
Number of shares
176,142,956
114,142,577
89,183,155
52,196,706
42,075,474
% of issued share capital
(excluding shares held as
treasury shares)
13.9
9.0
7.1
4.1
3.3
The following notifi cations have been received during the period
1 September 2012 to 19 October 2012:
Date of notifi cation
24 September 2012 Delta Lloyd N.V.
9 October 2012
Shareholder
Bestinver Gestion
S.A., SGIIC
Number of shares
38,221,087
61,554,348
% of issued share capital
(excluding shares held as
treasury shares)
3.03
4.87
Debenhams plc Annual Report and Accounts 2012 63
Directors’ report continued
64 Debenhams plc Annual Report and Accounts 2012
ADR programme. Each ADS represents four
ordinary shares of 0.01p each.
The holders of ordinary shares are entitled to
exercise voting rights, to receive dividends
when declared, to receive all shareholder
communications and to attend and speak
at general meetings of the Company. All
the shares rank pari passu. These rights and
the obligations attaching to the Company’s
ordinary shares, in addition to those
conferred on their holders by law, are set out
in the Company’s Articles of Association,
a copy of which can be obtained by writing
to the Company Secretary. The Debenhams
Retail Employee Trust 2004 (the “Trust”)
holds 1,068,301 ordinary shares in the
Company (0.08%). Of those shares, 344,765
shares relate to invested shares held by the
Trust on behalf of the participants of the
Deferred Bonus Matching Plan who instruct
voting rights in relation to those shares. Any
voting or other similar decisions relating to
the balance of shares held by the Trust is
taken by the trustees, who may take account
of any recommendations of the Company.
There are no signifi cant agreements to which
the Company is a party which take eff ect, alter
or terminate in the event of change of control
of the Company except that the supplier
agreements with certain major cosmetic
suppliers contain termination provisions
on change of control and the multicurrency
credit facility dated 16 July 2010 (as amended
by supplemental agreement dated 13 July
2011) contains mandatory prepayment.
There are no agreements providing for
compensation for directors or employees
on change of control. Details concerning the
impact on share options and share awards
held by directors or employees in the event
of a change of control are set out on page 71
of the remuneration report.
Essential contracts
Debenhams has contractual arrangements
with many organisations, but no one contract
is so material as to be essential to our
business, with the exception of the
warehouse operators.
Board of directors
The membership of the board and
biographical details of the directors are given
on pages 56 to 57. The rules governing the
appointment and replacement of the board
members are set out in the Company’s
Articles of Association.
Directors’ indemnities
In addition to the indemnity provisions in
their Articles of Association, the Company
and other Group companies have entered
into a direct indemnity agreement with
each of the directors and certain other
offi cers or senior employees of the Group.
The Company also maintains directors’ and
offi cers’ liability insurance which gives
appropriate cover for any legal action brought
against its directors and offi cers.
Directors’ interests
The benefi cial and non-benefi cial interests
of the directors and their connected persons
in the shares of the Company are shown on
page 73 of the remuneration report. Their
interests in options and awards over shares
in the Company are shown on page 74 of
the same report.
No director had, during or at the end
of the year, any material interest in any
contract of signifi cance in relation to
the Group’s business.
Employees
Business information and key messages are
cascaded to all employees throughout the
business via personal briefi ngs and email.
Briefi ngs are also held by the Chief Executive
and members of the board to update
employees on the performance of the
Company and the Company’s strategy.
The Employee Consultation Forum, which
is attended by elected representatives from
stores and head offi ce, is another medium
by which employees receive information
on the Company as well as giving employees
the opportunity to be consulted on certain
activities of the business.
Debenhams is committed to ensuring that
employees or applicants for employment
are treated equally regardless of gender, race,
ethic or national origin, religious, political
or philosophical beliefs, disability, marital
or civil partnership status, sexual orientation,
gender reassignment and age. Through our
equal opportunities policy we aim to create
an environment that off ers all employees
the chance to use their skills and talent.
As part of the Company’s policy on equality
of opportunity, decisions on recruitment,
training, promotion, pay, terms and
conditions and leavers are based solely on
objective, job-related criteria and personal
competence and performance. The
Company seeks wherever possible to make
reasonable adjustments to ensure that an
employee who becomes disabled during the
course of his or her employment is able to
continue working eff ectively. This includes:
providing equipment or altering working
arrangements; providing additional training;
reallocating on a temporary or permanent
basis some of the employee’s duties to other
members of staff ; transferring the employee
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 eff ective.
Corporate Governance Statement
In accordance with the Financial Services
Authority’s Disclosure and Transparency
Rule (“DTR”) 7.2.1, the disclosures required
by DTR 7.2.2R to DTR 7.2.7 and DTR 7.2.10
are within the Chairman’s introduction
to governance on page 55, the Corporate
governance report on pages 58 to 62 and risk
review on pages 39 to 45 and are therefore
incorporated into this report by reference.
Disclosure of information to auditors
Each of the directors of the Company at
the time when the Directors’ Report was
approved confi rms that:
a) so far as the director is aware, there is no
information needed by the Company’s
auditors in connection with preparing their
report of which the Company’s auditors
are unaware
b) s/he has taken all the steps that s/he ought
to have taken as a director in order to make
herself or himself aware of any information
needed by the Company’s auditors in
connection with preparing the report and
to establish that the Company’s auditors
are aware of that information.
Auditors
PricewaterhouseCoopers LLP have indicated
their willingness to continue in offi ce and a
resolution dealing with their re-appointment
as auditors of the Company will be proposed
at the forthcoming Annual General Meeting.
Annual General Meeting
The Annual General Meeting of Debenhams
plc will be held at No.11 Cavendish Square,
London W1G 0AN on Tuesday 8 January
2013 at 2.00pm. The Notice is given, together
with explanatory notes, in the booklet which
accompanies this report.
By order of the board
Paul Eardley, Company Secretary
25 October 2012
Payment of suppliers
It is the Company’s policy to pay suppliers
in accordance with the agreed payment
terms provided that the invoice is properly
presented and not subject to dispute.
The ratio, expressed in days, between the
amounts owed by the Company to trade
creditors at the end of the year and the
amounts invoiced by suppliers in the
fi nancial year ended 1 September 2012 was
nil days (2011: nil days). The ratio, expressed
in days between the amounts owed by the
Group to trade creditors and the amount
invoiced by suppliers in the fi nancial year
ended 1 September 2012 was 59 days (2011:
60 days).
Financial instruments
Debenhams does not enter into fi nancial
instruments for speculative trade. Details
of fi nancial instruments entered into for
underlying risks are set out in note 22 on
page 105.
Political donations
There were no disclosable expenses made
during the fi nancial year which fall within
the defi nition of a political donation
under the Political Parties, Elections and
Referendums Act 2000. It is the Group’s
policy not to make donations to political
organisations or independent election
candidates or incur political expenditure.
Charitable giving
During the year the Group made charitable
donations totalling £0.75 million (2011:
£1.1 million). The Company supports various
charities. Key donations made during the
year were £178,144 to the NSPCC, £112,684
to the Breast Cancer Campaign, £77,071 to
the Estée Lauder MAC Aids campaign and
£53,842 to the Marine Conservation Society.
Following the incorporation of the
Debenhams Foundation in March 2012,
future funds raised for charity will go
through the foundation.
Going concern
After making enquiries, the directors
consider that the Group has adequate
resources to continue in operation for the
foreseeable future. For this reason and in
accordance with the Going Concern and
Liquidity Risk Guidance for Directors of UK
Companies 2009, published by the FRC in
October 2009, the directors have adopted the
going concern basis in preparing the
Financial Statements.
Overview
Strategy review
Finance and risk review
Sustainability
Governance
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Debenhams plc Annual Report and Accounts 2012 65
Remuneration report
Remuneration Committee:
Main activities during the year
• Reviewed the executive remuneration
strategy for 2013
• Approved the executive directors’
bonuses for 2012
• Approved the executive directors’
bonus plan for 2013
• Approved share awards and vesting
of awards
• Reviewed remuneration benchmarking
• Reviewed its terms of reference
66 Debenhams plc Annual Report and Accounts 2012
Dear shareholder
As the new chairman of the Remuneration Committee, I am pleased to present
our remuneration report for 2012, for which we will be seeking your approval at
our Annual General Meeting in January 2013.
As outlined earlier in this Annual Report, performance this year has been strong. We
have made excellent progress against our strategic goals, improving the store format and
customer experience, expanding product selection, increasing market share in our major
categories, improving our multi-channel off ering and expanding the brand internationally.
We have grown gross transaction value, like-for-like sales, profi t before tax and earnings
per share during the year and the share price has increased from 52p to 96.5p, adding
c.£550 million of value for shareholders.
The Committee believes that the remuneration for executives for the year appropriately
refl ects this performance against the demanding targets we set for them. Annual bonus
payments of 40% of base salary will be made as a result of profi t before tax (PBT)
performance of £158.3 million (4.2% growth on last year, 52 weeks to 1 September 2012
vs 52 weeks to 27 August 2011) and long-term incentive awards granted in 2009 will vest
for the fi rst time since the Company listed in 2006, with PSP awards vesting just above
threshold and ESOP awards vesting in full refl ecting progress towards long-term goals.
During the year, the Committee reviewed the performance measures for the annual
bonus plan and determined that the 2013 annual bonus plan will be based on 80% PBT
performance and 20% on a like-for-like sales and gross margin percentage performance
matrix (previously 100% based on PBT). The Committee considers that these measures
are consistent with the four pillars of our strategy and therefore most appropriate to create
a strong alignment with shareholder value creation and eff ectively incentivise executives to
grow profi t and like-for-like sales on an annual basis whilst motivating focus on gross margin.
After careful consideration and personal consultation with a number of major
shareholders and investor representatives, the Committee decided that for 2013 only, the
Chief Executive will be made a PSP award of 200% of base salary. The Committee deemed
it appropriate to make a slightly larger award to the Chief Executive this year in light of
the strong business performance since his appointment, including signifi cant share
price appreciation, his exceptional personal performance and to enhance his longer term
alignment with our four pillared strategy. The Committee believes this award will have
a very positive retention and motivational impact on the Chief Executive. For 2014,
it is intended that the award level will revert to the normal policy.
This year we have seen signifi cant focus on improving the transparency of reporting on
executive pay. Although based on the current timeline Debenhams will not be formally
required to provide disclosure in line with the legislation until the year ending August
2014, we have provided some additional disclosures in order to help shareholders better
understand our remuneration policy and practice. Our directors’ remuneration report
received a strong level of support in January 2012 with 98% of shareholders voting in
favour of the resolution.
Dennis Millard
Chairman, Remuneration Committee
Director
Dennis Millard (appointed Committee
Chairman 1 September 2012)
Adam Crozier (resigned as Committee
Chairman on 1 September 2012)
Martina King
Nigel Northridge
Mark Rolfe
Sophie Turner Laing
Position
Senior independent
director
Independent non-
executive director
Independent non-
executive director
Independent non-
executive Chairman
Independent non-
executive director
Independent non-
executive director
Number of meetings held
and attended during the year
3/3
3/3
3/3
3/3
3/3
3/3
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
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75
This remuneration report for the year ended 1 September 2012 complies with the requirements of the Listing Rules of the UK Listing Authority,
Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and the provisions of the 2010
UK Corporate Governance Code.
Part 1: Unaudited information
The Remuneration Committee
Committee members
The Committee chairman, Dennis Millard (chairman from 1 September 2012) is joined by Nigel Northridge, Martina King, Mark Rolfe and Sophie
Turner Laing to form the Remuneration Committee. Details of each of the member’s background and experience is provided within their
biography on pages 56 to 57.
Role of the Committee
The full terms of reference for the Committee, which are reviewed annually, are available on the Company’s website at www.debenhamsplc.com.
In summary, the Committee has responsibility for determining all elements of the remuneration of the executive directors and the Company
Secretary together with the provisions of their service agreements, reviewing the bonus structure for senior managers below board level,
reviewing the appropriateness and relevance of the Company’s remuneration policy (taking into account the remuneration arrangements and
levels across the Company) and administering all aspects of any share incentives in operation for senior management. The remuneration of the
non-executive directors is a matter for the Company Chairman and the executive members of the board.
Advisors to the Committee
In performing its duties, the Committee has received advice from Deloitte LLP (“Deloitte”) who acted as external advisors to the Committee
throughout the fi nancial year, providing independent advice on directors’ remuneration and share incentives. Deloitte is one of the founding
members of the Remuneration Consulting Group (“RCG”) and complies with the voluntary code of conduct in respect of the provision of
remuneration consulting services. Deloitte also provides industry and comparative employee remuneration data to Debenhams’ management.
Deloitte also provided unrelated advisory services in respect of corporate and employment taxes during the year. The Chief Executive, Chief
Financial Offi cer and HR Director have attended Committee meetings and provided advice to the Committee during the year. They are not in
attendance when matters relating to their own compensation or contracts are discussed.
Remuneration policy
It is the Company’s remuneration policy to provide packages that will attract, motivate and retain high calibre executives in a competitive retail
market and, where possible, to do this in the most cost eff ective way for the business. Remuneration structures are designed to support the
business strategy with the majority of the remuneration package being linked to the delivery of performance, paid in a combination of cash and
shares. Short-term and long-term performance measures have been selected to be aligned with the delivery of the four pillared business strategy
through an annual focus on increasing sales volume while improving margin and profi tability and a long-term focus on growing earnings which
ensure that returns to shareholders remain strong.
When determining remuneration policy and arrangements for executive directors, the Remuneration Committee considers pay and
employment conditions elsewhere in the Group to ensure that pay structures from executive director to store manager are appropriately aligned
and that levels of remuneration remain appropriate in this context. The Remuneration Committee also considers the pay and practices of
companies of a similar size and complexity and other companies in the retail sector through the review of external survey data and
benchmarking provided by Deloitte in order to inform its consideration of the remuneration of Company executives.
In addition to basic salary and pension provision (or equivalent cash contribution), the Company seeks to incentivise its executives and senior
managers through an annual bonus scheme and through its share incentives.
Remuneration policy for 2013
The Remuneration Committee considered the remuneration policy during the year and determined that the majority of elements would remain
the same as for 2012. However, the Committee did review and make changes to the annual bonus performance targets and the PSP opportunity
for the Chief Executive for 2013. Further details are provided later in this report.
Debenhams plc Annual Report and Accounts 2012 67
Remuneration report continued
Summary of remuneration
The following table summarises the various elements of executive remuneration:
Element
Base salary
Annual
bonus
Purpose and link to
remuneration policy
• Refl ects the competitive
market salary level for the
individual and their role
• Takes account of personal
performance and
contribution to corporate
performance
• Rewards the achievement
of stretching annual profi t
and Group fi nancial goals
Performance
Share Plan
(“PSP”)
• Aligns with shareholder
interests through the
delivery of shares
• Rewards growth in earnings
and maintenance of an
effi cient and sustainable
level of return on our capital
Benefi ts
• Refl ects market practice
Pension
• Provides funds to allow
executives to save for
retirement
Key features
• In cash
• Based on individual
contribution
• Reviewed annually
Policy operated in 2012
• Chief Executive – £600,000
• CFO – £400,000
Policy for 2013
• Salary increase of 2.5% with
eff ect from 1 September 2012,
in line with the wider
Company pay policy
• In cash following year end • Maximum award of 100%
• Maximum award of 100%
base salary
base salary
• 40% of base salary awarded
• 80% of the bonus will be based
in cash based on 4.2% increase
in profi t before tax
• Chief Executive received an
award of 150% of base salary.
CFO received an award of
100% of base salary
• PSP awards subject to a
combination of 75% EPS
and 25% ROCE
on profi t before tax
performance and 20% based
on matrix of like-for-like sales
and gross margin percentage
performance
• PSP award level of Chief
Executive reviewed during
the year
• In 2013 only, the Chief
Executive will be made an
award of 200% of base salary.
The CFO’s award will be 100%
of base salary. It is intended
that the award level will revert
to the normal policy in 2014.
• PSP awards subject to a
combination of 75% EPS
and 25% ROCE
• No change
• No change
• No change
• No change
• Maximum award of
200% of base salary
(250% of base salary
in exceptional
circumstances)
• Awards vest after
three years
• It is intended that the PSP
will be the key incentive
vehicle going forward with
awards being granted
on an annual basis
• Car allowance
• Healthcare
• Dental insurance
• Life insurance
• 15% of base salary
• Executive directors are
provided a salary
supplement in lieu
of a pension provision
Components of remuneration
Base salary
The Committee considers base salary and salary increases for executives in the context of remuneration levels at companies of a similar size and
complexity and comparable companies in the FTSE 350 retail sector, as well as considering salary increases across the Group’s wider employee
population. The Committee’s policy is to set base salaries at an appropriate level to attract and retain the quality of individuals required to run
a business of the size and complexity of Debenhams successfully but without paying more than is necessary to do this. The salary increases
awarded to the Chief Executive and Chief Financial Offi cer with eff ect from 1 September 2012 of £615,000 (2.5%) and £410,000 (2.5%)
respectively are in line with the wider Company pay policy.
Executive directors bonus schemes
2012 bonus
As disclosed in last year’s remuneration report, the annual bonus scheme for executive directors for 2012 was based on PBT with a maximum
bonus potential of 100% of base salary. A target payout of 40% of salary would have been triggered by the achievement of a PBT target of £158.3
million with the maximum only being paid out for performance signifi cantly in excess of this level. The Committee considered the target to be
both stretching and represent value creation for shareholders.
For 2012 the Company achieved the target PBT of £158.3 million which represented growth of 4.2%, 52 weeks to 1 September 2012 vs 52 weeks to
27 August 2011. The Committee believes that the 40% bonus payment, recognises the excellent performance of the executive directors in terms
of delivery against the strategic pillars and fi nancial improvement over the period in what was another challenging year for the retail sector.
68 Debenhams plc Annual Report and Accounts 2012
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Finance and risk review
Sustainability
Governance
Accounts
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2013 bonus
The Committee reviewed the operation of the annual bonus plan during the year and decided to introduce a like-for-like sales and gross margin
percentage performance matrix alongside the existing PBT measure. The weighting of the measures will be 80% PBT and 20% gross margin
percentage performance matrix. The Committee considers that these measures are the most appropriate to create a strong alignment with
shareholder value creation and eff ectively incentivise executives to grow profi t and like-for-like sales on an annual basis whilst motivating focus
on increasing the gross margin. This is illustrated below:
2012 performance measures
2013 performance measures
20%
LFL sales and gross margin matrix
100%
PBT performance
80%
PBT performance
The maximum bonus opportunity will remain at 100% of base salary, payable in cash. 40% of the bonus will be payable for delivering threshold
levels of performance with the maximum bonus only being payable on the delivery of performance signifi cantly in excess of plan.
The Company’s share incentives
The Committee continues to consider that the Debenhams Performance Share Plan (“PSP”) is the most appropriate long-term incentive plan for
the business as it provides an incentive to deliver superior corporate performance whilst creating alignment with shareholder interest through
the delivery of shares. As communicated last year, it is the Committee’s intention to grant long-term incentive awards annually to executive
directors and other key senior managers under the PSP.
The Debenhams Performance Share Plan (“PSP”)
The Committee has discretion to grant awards under the PSP up to a maximum of 200% of base salary to executive directors and other senior
executives. Up to 250% of base salary may be awarded in exceptional circumstances.
Awards under the PSP comprise a right to receive free shares or a nil cost option. Awards under the PSP normally vest on the third anniversary
of the date of grant (and in the case of nil cost options must be exercised within six months of vesting) subject to satisfaction of performance
conditions set by the Remuneration Committee at the time awards are granted and generally provided that the participant remains in
employment. In addition, in order for the award to vest the Remuneration Committee must be satisfi ed that the underlying fi nancial
performance of the Company over the performance period is suffi cient to justify the vesting of the award.
2013 award levels
The Remuneration Committee proposes that for 2013 only the Chief Executive will be made a PSP award of 200% of base salary to ensure
alignment with the four pillared strategy. It is intended that the PSP award level for the Chief Executive in future years will return to the normal
level of 150% of base salary. The award for the CFO will be 100% of base salary.
Performance measures
The vesting of PSP awards is based on stretching earnings per share (EPS) and return on capital employed (ROCE) performance targets.
The Committee considers that EPS and ROCE are the most appropriate performance metrics for our business, as growing our earnings while
maintaining an effi cient and sustainable level of return on capital is a key strategic driver of business performance and they are closely aligned
with the creation of shareholder value. For any fi nancial year of the Company, ROCE means profi t before interest and tax excluding any pension
credit or debit divided by consolidated balance sheet net assets excluding net debt, pension balances, corporation tax and deferred tax. Should
any performance condition not be met at the end of the relevant performance period, that portion of the award will lapse immediately without
any opportunity to re-test the relevant performance condition.
Targets for 2013 awards
Following shareholder consultation, the Remuneration Committee reviewed the performance targets for the awards to be made in November
2012 and, in the context of the long-term strategic plan, analysts’ forecasts and market practice, agreed that the 25% of award based on ROCE
performance be stretched to trigger threshold vesting at average ROCE equal to the cost of capital plus 1%.
The targets therefore proposed for awards to be made in November 2012 are:
Performance measures
Targets
Threshold (30% vesting)
Maximum (100% vesting)
75% based on absolute EPS growth
25% based on ROCE performance vs cost of capital
Absolute EPS growth of 6% per annum
Absolute EPS growth of 12% per annum
Average ROCE equal to the cost of capital plus 1%
Average ROCE equal to the cost of capital plus 5%
Both the EPS and ROCE elements of the awards vest on a straight line basis between 30% and 100% based on performance achieved between
the threshold and maximum targets disclosed.
Debenhams plc Annual Report and Accounts 2012 69
Remuneration report continued
2009 and 2011 PSP awards
The table below sets out the performance conditions of the 2009 and 2011 PSP awards.
Date of grant
24 November 2009
Vesting criteria
EPS growth
23 May 2011
EPS growth
1 November 2011
Performance measures
Performance condition over three year period
Below absolute growth of 6% pa = zero vesting
Absolute growth of 6% pa = 30% vesting
Absolute growth of 10% pa = 100%
Between absolute growth of 6% and 10% pa = straight line basis between 30% and 100%
Below absolute growth of 6% pa = zero vesting
Absolute growth of 6% pa = 30% vesting
Absolute growth of 10% pa = 100%
Between absolute growth of 6% and 10% pa = straight line basis between 30% and 100%
75% based on absolute EPS growth
25% based on ROCE performance vs cost of capital
Targets
Threshold
(30% vesting)
Maximum
(100% vesting)
Absolute EPS growth
of 6% per annum
Absolute EPS growth
of 12% per annum
Average ROCE which is equal to the cost of capital
Average ROCE equal to the cost of capital plus 5%
Reported EPS in the 2008/09 base year for the PSP performance period ended 1 September 2012 was impacted by the fi rm placing and placing
and open off er of new share capital that took place in June 2009, prior to the grant in November 2009 of PSP share awards for this performance
period. In accordance with the PSP rules the Remuneration Committee has determined that it would be appropriate for this purpose for base
year EPS to be calculated as if the fi rm placing and placing and open off er took place at the start of the year with a corresponding increase to profi t
after tax to refl ect the interest benefi t from the additional capital. On this basis, EPS growth for the period amounted to 6.1 % and 32% of the award
granted in November 2009 will therefore vest on 24 November 2012. In reaching this decision, the Remuneration Committee considered that:
the minimum EPS growth targets of 6% per annum were appropriately based on this methodology; no other PSP awards vested during the
performance period in question though determination thereof utilised this method and therefore no participants benefi tted from awards based
on any other methodology; and that the resultant outcome was fair in the context of the earnings performance demonstrated, particularly over
the last fi nancial year, in what has been a very tough economic climate for the retail sector.
No awards under the PSP vested or were exercised during the year.
The Debenhams Deferred Bonus Matching Plan (the “DBMP”)
The Committee has discretion to invite participants to invest up to 100% of net annual bonus earned into shares (“invested shares”). If the
participant remains in service for three years and retains the benefi cial ownership of all the invested shares , then subject to the satisfaction of a
stretching performance target s/he is eligible to receive a matching share award equal to the pre-tax amount of the bonus that has been invested.
If the performance target is not met at the end of the performance period, the matching share awards lapse immediately and the invested shares
are returned to the participant. There is no opportunity to re-test the performance condition.
All bonus eligible employees were off ered the opportunity to invest up to 50% of the 2010 bonus. Matching awards were therefore made under
this plan in November 2010. These awards have a primary performance metric of EPS. In addition, the awards are subject to the achievement
of an underpin level of ROCE performance. No executive directors have participated in the DBMP.
This plan has not been operated since November 2010.
The Debenhams 2006 Executive Share Option Plan (the “ESOP”)
The Committee has discretion to grant options to acquire shares to eligible employees. It is not currently intended that executive directors will
participate in the ESOP other than in exceptional circumstances (e.g. recruitment). Options with a face value of up to a maximum of 100% of base
salary can be granted under the plan. Options may, in exceptional circumstances, be granted with a market value in excess of this amount at the
discretion of the Remuneration Committee. Options can be granted in the form of unapproved options or HM Revenue & Customs approved
options (up to the prescribed HMRC limit, currently £30,000).
Share options are granted at the closing mid-market price on the day prior to the date of grant and normally become exercisable three years after
grant, expiring seven years later. The exercise of the options is subject to performance conditions set by the Remuneration Committee at the time
awards are granted. In addition, in order for the award to vest, the Remuneration Committee must be satisfi ed that the underlying fi nancial
performance of the Company over the performance period is suffi cient to justify the vesting of the options.
For options granted under the Scheme in 2009, the performance measure was based on the Company’s ROCE exceeding the cost of capital.
The Committee considered that ROCE was an appropriate performance condition as it incentivises sustainable, effi cient profi t performance.
If the performance condition is not met at the end of the performance period, the options will lapse immediately without any opportunity to re-test
the relevant performance condition. The Committee will consider the performance conditions for any future award of options at the time of grant.
The table below sets out the performance conditions of ESOP options existing during the year:
Date of grant
24 November 2009
Vesting criteria
ROCE growth against
cost of capital
Performance condition over three year period
ROCE <– cost of capital = zero vesting
ROCE > cost of capital = 30% vesting
ROCE > cost of capital + 5% = 100% vesting
Between these points the options vest on a straight line basis between 30% and 100%
Based on ROCE performance exceeding the cost of capital by 7.8% during the three year performance period ended 1 September 2012,
the options granted in November 2009 will become exercisable in full on 24 November 2012.
70 Debenhams plc Annual Report and Accounts 2012
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Details of the options held by Michael Sharp are disclosed on page 74. No options under the ESOP vested or were exercised during the year.
Debenhams 2006 Sharesave Scheme (the “Sharesave Scheme”)
Under the Sharesave Scheme, employees may be granted an option to acquire shares at a fi xed exercise price. At the end of the savings period
the employee may either exercise the option within six months of the end of the savings period using the savings contributions and bonus
accumulated or have the savings and bonus repaid. No options have been granted under this scheme and there is currently no intention
to use the scheme.
The Debenhams 2008 Share Incentive Plan
The Debenhams 2008 Share Incentive Plan is an unapproved plan operated by the Company. This plan is focused at key senior managers and
it is not intended that executive directors would participate in this plan. The purpose of the plan is to retain and incentivise key employees in
the short to medium-term. Awards under the plan are subject to continuing employment and performance conditions specifi c to the individuals’
role within the business. Existing awards under this plan were granted to key individuals in November 2010 and June 2012.
The Debenhams Retail Employee Trust 2004 (the “Trust”)
The Debenhams Retail Employee Trust 2004 currently holds 1,068,301 shares in the Company. 450,000 shares are held in the Trust to satisfy
potential grants made under The Debenhams 2008 Share Incentive Plan. The Trust also holds the invested shares of participants of the DBMP
totalling 344,765 shares. Dividends receivable on the shares held in the Trust which are not subject to the DBMP are waived on the
recommendation of the Company.
Funding of share schemes
It is the Company’s current intention to satisfy any future requirements of its share schemes in a method best suited to the interests of
the Company, either by acquiring shares in the market utilising shares held as treasury shares or, subject to institutional guidelines, issuing
new shares. Where the awards are satisfi ed by newly issued shares, the Company will comply with ABI guidelines on shareholder dilution.
Current levels of shareholder dilution are 0.69% (2011: 0.30%) of share capital.
Change of control
Generally the rules of the Company’s share schemes provide that in the event of a change of control, awards/options would vest to the extent
that the performance conditions (where applicable) are satisfi ed at the date of such event. Any such early vesting would generally be on a time
pro-rata basis.
Pension
Michael Sharp is a deferred member of the Debenhams Executive Pension Plan. Full details are disclosed on page 74 of this Report. Under the
terms of the directors’ contacts of employment, the executive directors are entitled to a salary supplement in lieu of pension provision of 15%
of base salary. These amounts are disclosed in the directors’ emoluments table on page 73.
Termination arrangements for Rob Templeman
As disclosed in last year’s report, Rob Templeman, the former Chief Executive, entered into a 12 month consultancy agreement with the
Company on 4 September 2011. At the agreement of both parties, the consultancy terminated on 31 December 2011. A total of £72,950 was paid
in respect of management consultancy and advisory services. Mr Templeman also received £13,887 in respect of pay and benefi ts earned during
the period 1 September 2011 to 4 September 2011.
Termination arrangements for Chris Woodhouse
Chris Woodhouse resigned from the board on 10 January 2012 and his employment with the Company terminated on 31 January 2012. In
accordance with this contract the Company made a payment to Chris Woodhouse equal to the aggregate of 12 months’ basic salary and the
value of his annual contractual benefi ts. The total amount paid to Mr Woodhouse in respect of compensation for loss of offi ce was £577,319.
The terms of Mr Woodhouse’s service agreement dated 3 May 2006 also entitled him to a payment equal to the average of the annual bonus paid
in the two bonus years prior to the termination of employment. In light of current best practice regarding the inclusion of bonus in liquidated
damages provisions in executive director service contracts, the Committee agreed with Mr Woodhouse that this element of liquidated damages
which amounted to £306,566 would not be paid. The Company’s policy regarding bonus payments in liquidated damages provisions now
refl ects best practice and executive director service contracts are in line with this policy.
Mr Woodhouse also earned a prorated bonus of £79,840 under the executive directors’ annual bonus scheme for the Company’s fi nancial year
ending 1 September 2012. This bonus was based on the same performance conditions as for other senior executives.
The 2006 service agreement for Chris Woodhouse permitted him to hold up to two non-executive directorships in non-competing
companies and to retain payments received in respect of those other directorships. Chris Woodhouse, who was non-executive chairman
of Agent Provocateur Ltd., retained fees of £20,547 (2011: £18,943) during the period 4 September 2011 to 31 January 2012 together with £62,111
(2011: £150,000) in respect of his role of group non-executive chairman of Gondola Group Limited.
Debenhams plc Annual Report and Accounts 2012 71
Remuneration report continued
Performance graph
The performance graph below shows the Company’s total shareholder return against the FTSE 350 General Retailers Index over the period from
1 September 2007 to 1 September 2012. The FTSE 350 General Retailers Index has been chosen as Debenhams has been a member throughout
the period and it is made up of a broad spectrum of retail competitors (including major general retail listed competitors) in the principal product
areas in which the Company trades.
100
80
60
40
20
1 September 2007
30 August 2008
29 August 2009
28 August 2010
3 September 2011
1 September 2012
Debenhams
FTSE 350 General Retailers
(Source: DataStream)
Chairman and non-executive directors
Terms and conditions
Nigel Northridge was appointed a non-executive director of the Company on 1 January 2010 and became Chairman on 1 April 2010.
His appointment as Chairman is subject to the terms of a letter of appointment dated 28 January 2010 and the appointment is for a term of three
years ending on 31 March 2013 which may be extended by further terms of three years by mutual agreement. In addition to time commitment,
the annual engagement fee, and other business interests, the Chairman is permitted to hold other directorships provided that any such
appointment does not interfere with his position at the Company.
The non-executive directors have letters of appointment from the Company covering matters such as duties, time commitment, fees and other
business interests. The non-executive directors, excluding Dennis Millard, were appointed for an initial three years which may be extended for
a further term of three years by mutual agreement. Both Martina King and Sophie Turner Laing have been appointed for a further three years
following the end of their initial engagement on 31 July 2012. Dennis Millard’s appointment may be terminated by either party giving one
month’s notice.
All appointments are subject to the Company’ Articles of Association and the annual shareholders’ re-election. The letters of appointment
do not contain a provision for compensation if their appointments are terminated.
Fees for non-executive directors are determined by the board and are made up of an annual fee for acting as a non-executive director of the
Company together with additional fees for membership of and chairing a board committee. There is a further fee for acting as senior independent
non-executive director. The non-executive directors do not take part in discussions on their own remuneration which is reviewed annually
by the board. The fees are set to refl ect the time which they are required to commit to their duties, their experience and the amounts paid to
non-executive directors in comparable companies. Fees for the non-executive directors remained frozen for 2012 with the exception that the
fee for Remuneration Committee chairman was increased from £7,500 to £10,000 to refl ect the responsibility and time commitment for this
role and to align the fee with that paid for the chairmanship of the Audit Committee.
Details of the fees for the Chairman and the non-executive directors are set out below. Their letters of appointment are available for inspection
at the Company’s registered offi ce during normal business hours and at the Annual General Meeting.
Name
Nigel Northridge
Dennis Millard
Adam Crozier*
Martina King
Mark Rolfe
Sophie Turner Laing
* Resigned 1 September 2012
** Fee for chairing the sustainability committee
Date of joining
the Company
1 January 2010
9 May 2006
9 May 2006
1 August 2009
1 October 2010
1 August 2009
Fees
£
175,000
40,000
40,000
40,000
40,000
40,000
Committee
member fee
£
0
5,000
5,000
7,500
5,000
7,500
Committee
chairman fee
£
0
10,000
7,500
7,500**
10,000
0
SID Fee
£
0
10,000
0
0
0
0
Current
annual fee
£
175,000
65,000
52,500
55,000
55,000
47,500
Executive director terms and conditions
Executive director contracts
Michael Sharp entered into a service agreement with the Company on 3 May 2006. His agreement is terminable by either party giving not less
than 12 months’ written notice. If the Company terminates the employment without due notice, other than in circumstances such as gross
misconduct or other immediate justifi able cause, the Company is required to make a payment equal to the aggregate of the executive director’s
72 Debenhams plc Annual Report and Accounts 2012
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basic salary and the value of any contractual benefi ts for the notice period. Mr Sharp’s original contract also included that in the event of
termination he would be entitled, as part of his liquidated damages, to receive a payment equal to the average of the last two years’ annual bonus.
When Mr Sharp was promoted to Chief Executive on 5 September 2011 this provision was removed from his contract in line with best practice.
Simon Herrick entered into a service agreement with the Company on 19 October 2011. His agreement is terminable by either party giving not
less than 12 months’ written notice. If the Company terminates the employment without due notice, other than in circumstances such as gross
misconduct or other immediate justifi able cause, the Company is required to make a payment equal to the executive director’s basic salary for
the notice period.
Executive directors are entitled, in addition to salary, to other benefi ts or equivalent cash allowances, the value of which is set out in the table of
directors’ emoluments. Such benefi ts include company car and fuel, life, medical, dental and personal accident insurance together with product
discount and personal fi nancial advice.
Outside appointments for executive directors
Any proposed external directorships are considered by the Nomination Committee to ensure they do not cause a confl ict of interest.
Neither of the current executive directors hold any such directorships.
Directors’ shareholdings
The interests of the directors in the share capital of the Company as at 1 September 2012 are shown below. Awards granted under the PSP
and ESOS are shown in Part 2 of this report.
Director
Nigel Northridge
Michael Sharp(1)
Simon Herrick
Martina King
Dennis Millard
Mark Rolfe
Sophie Turner Laing
Notes:
(1) As at 19 October 2012 Mr Sharp’s holding includes 218,904 shares held by The Sharp Discretionary Settlement of which he is a Trustee
Ordinary shares held as at
4 September 2011
100,000
5,854,579
0
10,000
69,455
30,000
20,000
Ordinary shares held as at
1 September 2012
100,000
5,954,579
26,250
10,000
69,455
30,000
20,000
Ordinary shares held as at
19 October 2012
100,000
5,954,579
26,250
10,000
69,455
30,000
20,000
In order to align the interests of executives with those of shareholders and to demonstrate the executives’ ongoing commitment to the
business, the Committee has this year introduced a shareholding guideline policy. Executives are required to build up and maintain a holding
of Debenhams shares equal to one times base salary. Executives are expected to retain 50% of any post-tax shares that vest under any share
incentive plans until this shareholding is reached. The Committee expects executives to have met the shareholding guideline policy by the
fi fth anniversary of their appointment.
Part 2: Audited information
Directors’ emoluments
The remuneration of each director who served during the year is set out in the following table.
Salary/fees
£
175,000
599,243
333,333
10,562
198,404
52,500
55,000
65,000
47,500
47,500
1,584,042
Director
Nigel Northridge
Michael Sharp
Simon Herrick(1)
Rob Templeman(2)
Chris Woodhouse(3)
Adam Crozier
Martina King
Dennis Millard
Mark Rolfe
Sophie Turner Laing
Total
Notes:
(1) Mr Herrick joined the Company on 1 November 2011
(2) Mr Templeman left the Company on 4 September 2011
(3) Mr Woodhouse left the Company on 31 January 2012
Benefi ts
£
–
40,232
15,312
1,741
11,663
–
–
–
–
–
68,948
Annual
allowance
in lieu
of pension
£
–
89,886
50,000
1,584
26,189
–
–
–
–
–
167,659
Compensation
for Loss
of Offi ce
£
–
–
–
–
577,319
–
–
–
–
–
577,319
Bonus
£
–
240,000
134,137
–
79,840
–
–
–
–
–
453,977
Total
2012
£
175,000
969,361
532,782
13,887
893,415
52,500
55,000
65,000
47,500
47,500
2,851,945
Total
2011
£
175,000
859,495
–
1,044,515
720,268
52,500
54,154
65,000
43,542
47,500
3,061,974
Debenhams plc Annual Report and Accounts 2012 73
Remuneration report continued
Pension
Michael Sharp is a deferred member of the Debenhams Executive Pension Plan. He ceased to accrue benefi ts in that plan on 31 March 2006.
The table below shows his pension accrued at the year end:
Increase in
accrued pension
during the year
(£)
9,468
Increase in
accrued pension
during the year
(net of infl ation)
(£)
(42)
Accumulated total
accrued pension
at 1 September 2012
(£)
199,673
Transfer value as at
3 September 2011
of accrued
pension as at
3 September 2011
(£)
4,383,809
Transfer value as at
1 September 2012
of accrued
pension as at
1 September 2012
(£)
5,172,559
Increase in
transfer value
during the period
(£)
788,750
Director
Michael Sharp
Directors’ interests in the performance share plan
Michael Sharp
Simon Herrick
Date of award
24 November
2009
1 November
2011
1 November
2011
Number of
shares held at
3 September
2011
485,902
0
0
Shares
awarded
during
the year
0
1,396,973
620,877
Shares
lapsed
during
the year
0
Number of
shares held at
1 September
2012
485,902
0
0
1,396,973
620,877
Directors’ interests in the executive share option scheme
Market
value
Earliest
on date of
date of
award
vesting
83.35p 24 November
2012
1 November
2014
1 November
2014
64.43p
64.43p
Expiry
date of
options
24 May 2013
1 May 2015
1 May 2015
Number of
shares under
option held at
3 September
2011
35,108
Shares
granted
during
the year
0
Shares
lapsed
during
the year
0
Option price
85.45p
Number
of shares
held at
1 September
2012
Earliest
date of
exercise
35,108 24 November
2012
Expiry
date of
options
24 November
2019
438,853
0
0
85.45p
438,853 24 November
2012
24 November
2019
Michael Sharp
Date of grant
Approved
scheme:
24 November
2009
Unapproved
scheme:
24 November
2009
The closing mid-market price of the Company’s shares on 31 August 2012 was 96.5 pence and ranged from 51.2 pence to 96.5 pence during the
period from 4 September 2011 to 1 September 2012.
On behalf of the board
Dennis Millard
Chairman of the Remuneration Committee
25 October 2012
74 Debenhams plc Annual Report and Accounts 2012
Statement of directors’ responsibilities
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
The directors are responsible for preparing the Annual Report, the Remuneration Report and the Financial Statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare fi nancial statements for each fi nancial year. Under the law, the directors have elected to prepare
the Group Financial Statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and
the Parent Company fi nancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). Under company law, the directors must not approve fi nancial statements unless they are satisfi ed that
they give a true and fair view of the state of aff airs of the Group and the Company and of the profi t or loss of the Group for that period. In preparing
these Financial Statements, the directors are required to:
• Select suitable accounting policies and then apply them consistently
• Make judgements and accounting estimates that are reasonable and prudent
• State whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Group and Parent Company fi nancial statements respectively; and
• Prepare the fi nancial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business
The directors are responsible for keeping adequate accounting records that are suffi cient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the fi nancial position of the Company and the Group and enable them to ensure that the fi nancial
statements and the remuneration report comply with the Companies Act 2006 and, as regards the Group fi nancial statements, Article 4 of the
IAS regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The directors are responsible for maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of fi nancial statements may diff er from legislation in other jurisdictions.
Directors’ responsibility statement pursuant to disclosure and transparency rule 4.1.12
Each of the directors, whose names and functions are detailed on pages 56 and 57, confi rms that to the best of his/her knowledge:
• The Group Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view
of the assets, liabilities, fi nancial position and profi t of the Group; and
• The Directors’ Report contained in this report includes a fair review of the development and performance of the business and the position
of the Company and the Group, together with a description of the principal risks and uncertainties that it faces.
By order of the board
Michael Sharp
Chief Executive
25 October 2012
Simon Herrick
Chief Financial Offi cer
Debenhams plc Annual Report and Accounts 2012 75
Independent auditors’ report to the
members of Debenhams plc (Group)
We have audited the Group Financial Statements of Debenhams plc for the 52 week period ended 1 September 2012 which comprise the
Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated
Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes. The fi nancial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union.
Respective responsibilities of directors and auditors
As explained more fully in the statement of directors’ Responsibilities set out on page 75, the directors are responsible for the preparation of the
Group Financial Statements and for being satisfi ed that they give a true and fair view. Our responsibility is to audit and express an opinion on the
Group Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Scope of the audit of the fi nancial statements
An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements suffi cient to give reasonable assurance
that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether
the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the
reasonableness of signifi cant accounting estimates made by the directors; and the overall presentation of the Financial Statements. In addition,
we read all the fi nancial and non-fi nancial information in the Annual Report and Accounts to identify material inconsistencies with the audited
Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on fi nancial statements
In our opinion the Group Financial Statements:
• Give a true and fair view of the state of the Group’s aff airs as at 1 September 2012 and of its profi t and cash fl ows for the 52 week period
then ended
• Have been properly prepared in accordance with IFRSs as adopted by the European Union; and
• Have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• The information given in the Directors’ Report for the 52 week period for which the Group Financial Statements are prepared is consistent
with the Group Financial Statements
• The information given in the Risk Review set out on pages 39 to 41 in this Annual Report and Accounts with respect to internal control
and risk management systems and the information about share capital in the Directors’ report on pages 63 to 64 is consistent with the
Financial Statements
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• Certain disclosures of directors’ remuneration specifi ed by law are not made; or
• We have not received all the information and explanations we require for our audit
• A Corporate Governance Statement has not been prepared by the Parent Company
Under the Listing Rules we are required to review:
• The directors’ statement, set out on page 65, in relation to going concern
• The part of the corporate governance statement relating to the Company’s compliance with the nine provisions of the UK Corporate
Governance Code specifi ed for our review; and
• Certain elements of the report to shareholders by the board on directors’ remuneration
Other matter
We have reported separately on the Parent Company Financial Statements of Debenhams plc for the 52 week period ended 1 September 2012
and on the information in the remuneration report that is described as having been audited.
Martin Hodgson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
25 October 2012
76 Debenhams plc Annual Report and Accounts 2012
Consolidated Income Statement
For the financial year ended 1 September 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Finance income
Finance costs
Profit before taxation
Taxation
Profit for the financial year attributable to equity shareholders
Earnings per share attributable to equity shareholders (expressed in pence per share)
Basic
Diluted
Note
3, 4
6
8
9
10
12
12
2
10
32
46
52
75
53 weeks
ended
3 September
2011
£m
2,209.8
(1,913.1)
296.7
(70.2)
(42.8)
183.7
3.9
(27.3)
160.3
(43.1)
117.2
52 weeks
ended
1 September
2012
£m
2,229.8
(1,927.5)
302.3
(81.0)
(46.3)
175.0
1.2
(17.9)
158.3
(33.0)
125.3
Pence
per share
9.8
9.8
Pence
per share
9.1
9.1
Debenhams plc Annual Report and Accounts 2012 77
Consolidated Statement of Comprehensive Income
For the financial year ended 1 September 2012
Profit for the financial year
Other comprehensive (expense)/income
Actuarial (losses)/gains recognised in the pension schemes
Deferred tax credit/(charge) on actuarial losses or gains
Current tax credit on the pension schemes
Currency translation differences
Sale of available-for-sale investment
Change in the valuation of the available-for-sale investments
Cash flow hedges
– Fair value gains/(losses)
– Tax (charge)/credit on fair value gains or losses
– Reclassified and reported in net profit
– Tax charge on items reclassified and reported in net profit
– Recycled and adjusted against cost of sales
– Tax credit/(charge) on items recycled against cost of sales
Total other comprehensive (expense)/income
Total comprehensive income for the year
Note
23
24
15
9
52 weeks
ended
1 September
2012
£m
125.3
53 weeks
ended
3 September
2011
£m
117.2
(82.3)
16.9
2.3
(6.7)
–
(0.7)
5.0
(1.6)
2.0
(0.4)
(1.9)
0.5
(66.9)
58.4
75.8
(22.5)
2.1
4.3
(2.0)
(0.2)
(15.7)
3.9
4.7
(1.2)
1.8
(0.5)
50.5
167.7
78 Debenhams plc Annual Report and Accounts 2012
Consolidated Balance Sheet
As at 1 September 2012
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Available-for-sale investments
Derivative financial instruments
Other receivables
Retirement benefit assets
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Liabilities
Current liabilities
Bank overdraft and borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Net current liabilities
Non-current liabilities
Bank overdraft and borrowings
Derivative financial instruments
Deferred tax liabilities
Other non-current liabilities
Provisions
Retirement benefit obligations
Net assets
Shareholders’ equity
Share capital
Share premium account
Merger reserve
Reverse acquisition reserve
Hedging reserve
Other reserves
Retained earnings
Total equity
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
1 September
2012
£m
3 September
2011
£m
Note
13
14
15
22
17
23
24
16
17
22
18
20
22
19
26
20
22
24
25
26
23
27
864.9
661.6
1.9
0.8
19.3
–
83.2
1,631.7
332.3
75.4
7.8
44.0
459.5
(163.4)
(1.9)
(525.4)
(31.0)
(5.3)
(727.0)
(267.5)
(249.3)
(8.9)
(64.7)
(321.9)
(1.1)
(57.3)
(703.2)
661.0
0.1
682.9
1,200.9
(1,199.9)
(2.6)
(10.5)
(9.9)
661.0
858.1
634.6
2.6
1.4
18.3
3.9
75.7
1,594.6
321.3
72.1
1.2
29.0
423.6
(168.1)
(8.5)
(489.1)
(43.7)
(6.2)
(715.6)
(292.0)
(244.6)
(4.2)
(74.1)
(318.9)
(1.2)
–
(643.0)
659.6
0.1
682.9
1,200.9
(1,199.9)
(6.2)
(3.1)
(15.1)
659.6
The financial statements on pages 77 to 118 were approved by the board on 25 October 2012 and were signed on its behalf by:
Simon Herrick
Chief Financial Officer
Debenhams plc Annual Report and Accounts 2012 79
Consolidated Statement of Changes in Equity
As at 1 September 2012
Balance at 28 August 2010
Profit for the financial year
Actuarial gain on pension schemes
Deferred tax charge on pension schemes
Current tax credit on pension schemes
Sale of available-for-sale investment
Change in the value of available-for-sale
investments
Currency translation differences
Cash flow hedges
– Fair value losses (net of tax)
– Reclassified and reported in net profit
(net of tax)
– Recycled and adjusted against the cost
of inventory (net of tax)
Total comprehensive income and
expense for the financial year
Share-based payment charge
Dividends paid
Total transactions with owners
Balance at 3 September 2011
Profit for the financial year
Actuarial loss on pension schemes
Deferred tax credit on pension schemes
Current tax credit on pension schemes
Change in the value of available-for-sale
investments
Currency translation differences
Cash flow hedges
– Fair value gains (net of tax)
– Reclassified and reported in net profit
(net of tax)
– Recycled and adjusted against the cost
of inventory (net of tax)
Total comprehensive income and
expense for the financial year
Share-based payment charge
Purchase of treasury shares
Dividends paid
Total transactions with owners
Balance at 1 September 2012
Note
23
24
15
15
28
11
23
24
15
28
27
11
Share capital
and share
premium
£m
683.0
–
–
–
–
–
Merger
reserve
£m
1,200.9
–
–
–
–
–
Reverse
acquisition
reserve
£m
(1,199.9)
–
–
–
–
–
Hedging
reserve
£m
0.8
–
–
–
–
–
Other
reserve
£m
(5.2)
–
–
–
–
(2.0)
Retained
earnings
£m
(176.2)
117.2
75.8
(22.5)
2.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
683.0 1,200.9 (1,199.9)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
683.0 1,200.9 (1,199.9)
–
–
–
(0.2)
4.3
–
–
–
–
–
172.6
1.4
(12.9)
(11.5)
(15.1)
125.3
(82.3)
16.9
2.3
–
–
–
–
–
–
–
–
2.1
–
–
–
(3.1)
–
–
–
–
(0.7)
(6.7)
–
–
–
(7.4)
–
–
–
–
(10.5)
62.2
1.6
(20.1)
(38.5)
(57.0)
(9.9)
(11.8)
3.5
1.3
(7.0)
–
–
–
(6.2)
–
–
–
–
–
–
3.4
1.6
(1.4)
3.6
–
–
–
–
(2.6)
Total
£m
503.4
117.2
75.8
(22.5)
2.1
(2.0)
(0.2)
4.3
(11.8)
3.5
1.3
167.7
1.4
(12.9)
(11.5)
659.6
125.3
(82.3)
16.9
2.3
(0.7)
(6.7)
3.4
1.6
(1.4)
58.4
1.6
(20.1)
(38.5)
(57.0)
661.0
For a description of the nature and purpose of each reserve, together with an analysis of other reserves, see note 27.
80 Debenhams plc Annual Report and Accounts 2012
Consolidated Cash Flow Statement
For the financial year ended 1 September 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Cash flows from operating activities
Cash generated from operations
Finance income
Finance costs
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of available-for-sale investment
Proceeds from sale of finance leases
Net cash used in investing activities
Cash flows from financing activities
Repayment of term loan facility
(Repayment)/drawdown of new facility
Purchase of treasury shares
Dividends paid
Finance lease payments
Debt issue costs
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Net cash and cash equivalents at beginning of financial year
Foreign exchange (losses)/gains on cash and cash equivalents
Net cash and cash equivalents at end of financial year
52 weeks
ended
1 September
2012
£m
53 weeks
ended
3 September
2011
£m
259.7
0.2
(13.8)
(44.6)
201.5
(101.4)
(17.2)
–
–
(118.6)
–
(10.0)
(20.1)
(38.5)
(2.2)
–
(70.8)
12.1
22.8
(0.3)
34.6
267.6
6.7
(26.3)
(48.6)
199.4
(94.3)
(19.7)
5.0
12.6
(96.4)
(548.6)
415.0
–
(12.9)
(0.1)
(4.1)
(150.7)
(47.7)
69.5
1.0
22.8
Note
30
15
30
20
11
20
31
Debenhams plc Annual Report and Accounts 2012 81
Notes to the Financial Statements
For the financial year ended 1 September 2012
1 General information
Introduction
Debenhams plc (“the Company”) is a public limited company incorporated and domiciled in the United Kingdom under the Companies
Act 2006 (Company No. 5448421). The address of the registered office is 1 Welbeck Street, London W1G 0AA.
The principal activity of the Company is that of a holding company. The principal activities of the Group and its subsidiaries (together
the “Group” or the “Debenhams Group”) is the sale of fashion clothing and accessories, cosmetics and products for use in the home.
The Group trades from department stores in the UK, the Republic of Ireland and Denmark, on the internet and has international
franchise stores.
The Group prepares its financial statements for the financial year ending on the nearest Saturday to 31 August of a given calendar
year. Consequently the financial year ended 1 September 2012 is a 52 week financial year, with the comparative financial year ended
3 September 2011 being a 53 week financial year.
The principal companies within the Group during the financial year ended 1 September 2012 are disclosed in note 33.
2 Accounting policies
The Group’s principal accounting policies, as described below, have been consistently applied to all financial years presented,
unless otherwise stated.
Basis of preparation
The consolidated financial statements have been prepared on the going concern basis and in accordance with International Financial
Reporting Standards (“IFRS”) including International Accounting Standards (“IAS”) and International Financial Reporting Interpretations
Committee (“IFRIC”) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under
accounting standards as adopted for use in the EU. The consolidated financial statements for the financial years ended 1 September 2012
and 3 September 2011 have been prepared under the historical cost convention as modified by the revaluation of available-for-sale
financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
The preparation of the financial statements, in conformity with IFRS, requires the use of estimates and assumptions that affect the
reporting amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses
during the reporting period. Although these results are based on management’s best knowledge of the amounts, events or actions,
actual results ultimately may differ from those estimates (see note 5).
Consolidation
The financial statements comprise a consolidation of the accounts of Debenhams plc and all its subsidiaries. Subsidiaries include all
entities over which the Group has the power to govern the financial and operating policies. The existence and effect of potential voting
rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which the Group has the power to control. They are de-consolidated from the date
that control ceases.
On consolidation, inter company transactions, balances and unrealised gains on transactions between Group companies are eliminated.
Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting
policies of the Company and its subsidiaries have been changed where these have a significant impact on the Group’s income statement
or balance sheet to ensure consistency with the policies adopted by the Group.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and
services provided in the normal course of business, net of staff discounts and the cost of loyalty scheme points, and is stated net of value
added tax and other sales-related taxes.
Revenue on department store sales of goods and commission on concession and consignment sales is recognised when goods are sold
to the customer. Retail sales are usually in cash or by credit or debit card. Internet sales are recognised when the goods are despatched
to the customer. Revenue from gift cards and gift vouchers sold by the Group is recognised on the redemption of the gift card or gift
voucher. Revenue from sales to franchisees is recognised when the goods are despatched.
It is the Group’s policy to sell its products to the end customer with a right of return. Accumulated experience is used to estimate and
provide for such returns at the time of sale.
Segmental reporting
IFRS 8 “Operating Segments” requires segment information to be presented based on what is reported to the Chief Operating Decision
Maker. The Group has identified the executive committee as its Chief Operating Decision Maker and has identified two operating
segments, UK and international.
Interest recognition
Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Finance charges
are calculated using the effective interest rate method.
Dividend distribution
A final dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s and Group’s financial
statements in the period in which the dividend is approved by the Company’s shareholders. Interim dividends are recognised
when paid.
82 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
2 Accounting policies continued
Retirement benefit costs
The liability or asset recognised in respect of defined benefit schemes is the fair value of the plan assets less the present value of the
defined obligation at the balance sheet date. Plan assets include various equities, bonds and alternative strategies and are managed
separately by investment managers. The defined benefit obligation is calculated annually by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligations are determined by discounting the estimated future cash
outflows using interest rates of high-quality corporate bonds that are denominated in sterling and that have terms to maturity which
approximate to the terms of the related pension liabilities.
Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement
and presented in the statement of comprehensive income.
Past service costs are recognised immediately in the income statement, unless the changes in pension plans are conditional on the
employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on
a straight line basis over the vesting period.
The Group operates a defined contribution scheme in the Republic of Ireland and Denmark and a stakeholder scheme in the UK and
Hong Kong. Contributions to these pension schemes are charged to the income statement as they fall due. Differences between
contributions payable in the period and contributions actually paid are shown as either accruals or prepayments in the balance sheet.
The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee
benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in
the future payments is available.
Share-based payments
The Group issues equity-settled share-based payments to certain employees. A fair value for the equity-settled share awards is measured
at the date of grant. The Group measures the fair value using the valuation technique most appropriate to value each class of award.
These are either a Black-Scholes, Monte Carlo or binomial pricing model.
The fair value determined at the grant date is expensed on a straight line basis over the vesting period, based on the Group’s estimate
of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions. At each balance sheet date,
the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original
estimates, if any, in the income statement, with a corresponding adjustment to equity.
When the options are exercised, the Company may issue new shares or utilise shares held as treasury shares. The proceeds received
net of any directly attributable transaction costs are credited to share capital (at nominal value) and share premium when the options
are exercised.
Foreign exchange
a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in sterling,
which is the Group’s presentation currency.
b) Group companies
The results and financial position of all Group entities that have a functional currency different from the presentation currency are
translated into the presentation currency as follows:
• Assets and liabilities are translated at the closing rate at the date of the balance sheet
• Income and expenses are translated at the average exchange rate (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates
of the transaction)
• Resulting exchange differences are recognised as a separate component of equity
c) Transactions and balances
Transactions denominated in foreign currencies are translated into the respective functional currency at average monthly rates.
Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates ruling at the balance sheet
date. Differences on exchange are taken to the income statement.
Translation differences on non-monetary financial assets such as equities classified as available-for-sale are included in the fair value
reserve in equity.
Foreign exchange gains and losses that relate to borrowings, cash and cash equivalents and the translation of inter company loans are
presented in the income statement within finance income or charges. All other foreign exchange gains and losses are presented in the
income statement within cost of sales.
Debenhams plc Annual Report and Accounts 2012 83
Notes to the Financial Statements continued
2 Accounting policies continued
Taxation
Taxation expense represents the sum of current tax and deferred tax.
Current tax is based on taxable profits for the financial period using tax rates that are in force during the period. Taxable profit differs
from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible
in other financial years and it further excludes items that are never taxable or deductible.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. If deferred tax arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss,
it is not accounted for. Deferred tax is determined using tax rates that have been enacted or substantially enacted at the balance sheet
date and are expected to apply when the related deferred income tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary
differences can be utilised.
Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversals
of the temporary differences is controlled by the Group and it is probable that the temporary differences will not reverse in the
foreseeable future.
Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity,
in which case the deferred tax is also dealt with in equity.
Leased assets
a) Finance leases
Leases of assets which transfer substantially all the risks and rewards of ownership to the Group are classified as finance leases. Finance
leases are classified as a financial liability and measured at amortised cost. Finance leases are capitalised at the inception of the lease at
the lower of the fair value of the leased plant and equipment or the present value of the minimum lease payments and depreciated over
the shorter of the useful economic life or the period of the lease. The resulting lease obligations are included in liabilities.
Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate
of interest on the remaining balance of the liability.
b) Operating leases
All other leases are classified as operating leases. Rentals payable under operating leases, net of lease incentives, are charged
to the income statement on a straight line basis over the period of the lease.
Where property lease contracts contain guaranteed fixed minimum incremental rental payments, the total committed cost
is determined and is calculated and amortised on a straight line basis over the life of the lease.
Business combinations
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.
The cost of an acquisition is measured as the fair value of the consideration given, liabilities incurred or assumed and equity
instruments issued by the Group in exchange for control of the acquiree. All costs directly attributable to an acquisition are expensed
to the income statement.
Identifiable assets and liabilities acquired in a subsidiary are measured at their fair values at the acquisition date, provided they meet
the conditions set out in IFRS 3 (Revised) “Business Combinations”. The excess of cost over the Group’s share of identifiable net assets
acquired is recognised as goodwill. If, after reassessment, the cost of acquisition is less than the fair value of assets acquired, the excess
is immediately recognised in the income statement.
Intangible assets
a) Goodwill
Goodwill on acquisition of subsidiaries represents the excess of the cost of an acquisition over the fair value of the Group’s share of the
net identifiable assets of the acquired subsidiary. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is not
amortised but tested for impairment annually, or when trigger events occur, and carried at cost less accumulated impairment losses.
Goodwill represents the goodwill for a portfolio of sites, which have been allocated to groups of cash-generating units on a regional basis
for the purpose of impairment testing.
b) Other intangible assets
Other intangible assets are held at cost less accumulated amortisation and any provision for impairment.
Internally generated software costs, where it is clear that the software developed is technically feasible and will be completed and
that the software generated will generate economic benefit, are capitalised as an intangible asset. Included within intangible assets are
assets in the course of construction. These assets comprise primarily web development projects including directly attributable costs
to bring the assets into use. Amortisation is provided at the following rates per annum to write off the costs of other intangible assets,
less residual value, on a straight line basis from the date on which they are brought into use.
Acquired licences and trademarks
Internally generated software
Purchased software
Up to 10%
12.5% to 33.3%
12.5% to 33.3%
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2 Accounting policies continued
Property, plant and equipment
Property, plant and equipment are held at historic purchase cost less accumulated depreciation and any provision for impairment.
Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for
its intended use.
Depreciation is provided at the following rates per annum to write off the cost of property, plant and equipment, less residual value,
on a straight line basis from the date on which they are brought into use:
Freehold land
Freehold buildings
Long leasehold land and buildings including landlords’ fixtures and fittings
Short leasehold land and buildings including landlords’ fixtures and fittings
Retail fixtures and fittings
Office equipment
Computer equipment
Vehicles
Not depreciated
1%
1% or life of lease if shorter
Life of lease
4% –25%
10% –12.5%
12.5% –33.3%
25% or life of lease
The assets’ useful economic lives and residual values are reviewed and adjusted, if appropriate, at each financial year end.
Gains and losses on disposal are determined by comparing proceeds with carrying amount. These are included in the income statement.
Included within property, plant and equipment are assets in the course of construction. These assets comprise stores, which are under
construction, including costs directly attributable to bring the asset into use. Transfers to the appropriate category of property, plant
and equipment are made when the store opens. No depreciation is provided on stores or other assets under construction.
Impairment testing
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject
to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment,
assets are grouped by store, which is the lowest level for which there are separately identifiable cash flows (cash-generating units). Non-
financial assets other than goodwill that have been impaired are reviewed at each reporting date for possible reversal of the impairment.
Available-for-sale investments
The Group classifies its investments as available-for-sale financial assets in accordance with IAS 39 “Financial Instruments: Recognition
and Measurement”. Available-for-sale financial investments are non-derivative assets. They are included in non-current assets unless
management intends to dispose of the investment within 12 months of the balance sheet date. Investments are recognised at fair value
plus any transaction costs.
The fair value of available-for-sale investments denominated in a foreign currency is calculated in that foreign currency and translated
at the spot rate at the reporting date.
An impairment test is performed annually on the carrying value of each investment. An impairment loss is recognised for the amount
by which the asset’s carrying value exceeds its recoverable amount. Impairment losses are recognised in equity.
Inventories
Inventories are stated at the lower of cost and net realisable value using the retail method and represent goods for resale. This method
intrinsically takes into account any stock loss or mark down to goods sold below cost. Concession inventories are not included within
inventory held by the Group.
Trade and other receivables
Trade receivables are stated at amortised cost less provisions for impairment. A provision for impairment of trade receivables is
established when there is evidence that the Group will not be able to collect all amounts due according to the original terms of the
receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of future cash
flows discounted at the effective interest rate. The movement in the provision is recognised in the income statement.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at the bank and other short-term liquid investments with
original maturities of approximately three months or less. Bank overdrafts are shown within borrowings in current liabilities
on the balance sheet.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost.
Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over
the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
Debenhams plc Annual Report and Accounts 2012 85
Notes to the Financial Statements continued
2 Accounting policies continued
Borrowing costs
Borrowing costs that are facility costs are recognised initially at fair value, and are amortised over the term of the facilities using the
effective interest rate on the committed amount of each facility.
Debt repurchase
The nominal value of debt repurchased has been accounted for as a loan redemption, reducing net borrowings at the balance sheet date.
Trade payables
Trade payables, defined as financial liabilities in accordance with IAS 39, are recognised initially at fair value and subsequently measured
at amortised cost using the effective interest method.
All of the trade payables are non-interest bearing.
Other payables
Included within other payables are lease incentives received from landlords either through developers’ contributions or rent-free
periods. These incentives are being credited to the income statement on a straight line basis over the term of the relevant lease.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and where it is more
likely than not an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are
measured at management’s best estimate of the expenditure required to settle the obligation at the balance sheet date.
Promotional activities – Provisions for promotional activities such as the cosmetics loyalty scheme are recognised where the Group
has a legal or constructive obligation to provide a customer with goods or services.
Restructuring – Provisions for restructuring are recognised when the Group has a detailed formal plan for the restructuring that has been
communicated to affected parties.
Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares in equity are shown as a deduction, net of tax, from the proceeds.
Where the Company purchases its own ordinary shares, the consideration paid, including any directly attributable incremental costs
(net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued.
Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental
transaction costs together with the related income tax effects, are included in equity attributable to the Company’s equity holders.
Derivatives
Derivatives comprise interest rate swaps and forward foreign exchange contracts. Derivatives are initially recognised at fair value on the
date a derivative contract is entered into and are subsequently re-measured at fair value. The method of recognising the resulting gain
or loss depends on whether the derivative is designated as an effective hedging instrument and the nature of the item being hedged.
The Group designates certain derivatives as hedges of highly probable forecast transactions (cash flow hedges).
At the inception of the transaction, the Group documents the relationship between hedging instruments and hedged items as well as its
risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at
the inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items.
i) Cash flow hedges
The effective portion of the changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognised in
equity. The gain or loss relating to the ineffective portion is recognised immediately in the relevant line of the income statement which
will be affected by the underlying hedged item. Forward exchange contracts designated as cash flow hedges are de-designated and
subsequently classified as “held for trading” when the underlying forecast transaction is recognised in the financial statements.
Amounts accumulated in equity are reclassified and adjusted against the initial measurement of the underlying hedged item when
the underlying hedged item is recognised on the balance sheet or in the income statement.
When a hedged instrument expires, is sold or when a hedge no longer meets the criteria for hedge accounting, hedge accounting
is discontinued. Any cumulative gain or loss existing in equity at that time is held in equity until the forecast transaction occurs.
When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately
reclassified to the relevant line of the income statement which would have been affected by the forecasted transaction.
ii) Derivatives That Do Not Qualify For Hedge Accounting
Certain derivatives do not qualify for hedge accounting. Changes in fair value of any derivative instruments that do not qualify for hedge
accounting are recognised immediately in the income statement within finance costs.
86 Debenhams plc Annual Report and Accounts 2012
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2 Accounting policies continued
New standards and interpretations
New or revised standards or interpretations which were mandatory for the first time in the financial year beginning 4 September 2011
did not have a material impact on the net assets or results of the Group.
At the date of approval of these financial statements, IAS 19 (Revised) “Employee Benefits” was in issue, but not yet effective.
Other standards and interpretations in issue, but not yet effective, are not expected to have a material effect on the Group’s net
assets or results.
The directors anticipate that the adoption of IAS 19 (Revised) “Employee Benefits”, in the financial year starting 1 September 2013, will
potentially have a material impact, dependent upon market conditions, on the financial statements of the Group. The revised standard
is expected to increase net finance costs and reduce operating profit. The extent of this impact is currently being assessed.
3 Segmental reporting
IFRS 8 “Operating Segments” requires disclosure of the operating segments which are reported to the Chief Operating Decision Maker
(“CODM”). The CODM has been identified as the executive committee, which includes the executive directors and other key
management. It is the executive committee that has responsibility for planning and controlling the activities of the Group.
The Group’s reportable segments have been identified as the UK and international. These have been re-stated from the previous
financial year to better reflect the way in which financial performance is managed. The segments are reported to the CODM to operating
profit level, using the same accounting policies as applied to the Group accounts. The Group does not review the assets and liabilities by
operating segment as these are reviewed on a group-wide basis given their transposable nature. As a result, no such analysis has
been provided.
Debenhams plc Annual Report and Accounts 2012 87
Notes to the Financial Statements continued
3 Segmental reporting continued
Segmental analysis of results
Financial year ended 1 September 2012
Gross transaction value
Concessions, consignments, staff discounts and loyalty schemes
External revenue
Operating profit
Other segment items
– Depreciation
– Amortisation of intangible assets
Financial year ended 3 September 2011 (re-stated)
Gross transaction value
Concessions, consignments, staff discounts and loyalty schemes
External revenue
Operating profit
Other segment items
– Depreciation
– Amortisation of intangible assets
Total segmental operating profit may be reconciled to total profit before taxation as follows:
Total operating profit
Finance income
Finance costs
Total
Revenues analysed by country, based on the customer’s location, are set out below:
United Kingdom
Republic of Ireland
Denmark
Rest of the world
Total
UK
£m
International
£m
Total
£m
2,204.6
(344.3)
1,860.3
144.3
72.6
7.7
2,181.1
(330.5)
1,850.6
156.2
72.8
7.0
503.4
(133.9)
369.5
30.7
9.8
1.5
498.2
(139.0)
359.2
27.5
10.7
1.5
1 September
2012
£m
175.0
1.2
(17.9)
158.3
1 September
2012
£m
1,860.3
136.5
142.7
90.3
2,229.8
2,708.0
(478.2)
2,229.8
175.0
82.4
9.2
2,679.3
(469.5)
2,209.8
183.7
83.5
8.5
3 September
2011
£m
183.7
3.9
(27.3)
160.3
3 September
2011
£m
1,850.6
144.1
136.9
78.2
2,209.8
Non-current assets, which comprise intangible assets, property, plant and equipment and other receivables analysed by country, are set
out below:
1 September
2012
£m
1,476.1
32.1
33.3
4.3
1,545.8
3 September
2011
£m
1,436.0
39.2
35.2
0.6
1,511.0
United Kingdom
Republic of Ireland
Denmark
Rest of the world
Total
88 Debenhams plc Annual Report and Accounts 2012
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4 Gross transaction value
Revenue from concession and consignment sales is required to be shown on a net basis, being the commission received rather than
the gross value achieved on the sale. Management believes that gross transaction value, which presents revenue on a gross basis before
adjusting for concessions, consignments, staff discounts and the cost of loyalty scheme points, represents a good guide to the overall
activity of the Group.
Gross transaction value
A reconciliation of gross transaction value to external revenue is included in note 3.
1 September
2012
£m
2,708.0
3 September
2011
£m
2,679.3
5 Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom
equal the related actual results. Estimates and judgements are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and
assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within
the next financial period are discussed below.
Estimated impairment of goodwill
The Group tests whether goodwill has suffered any impairment in accordance with the accounting policy stated in note 2. The
recoverable amount of cash-generating units is determined based on a value-in-use calculation. The method requires an estimate
of future cash flows and the selection of a suitable discount rate in order to calculate the net present value of the cash flows. Actual
outcomes could vary, see note 13 for further details.
Taxation and deferred taxation
The Group is subject to income taxes in the UK, the Republic of Ireland, Denmark and Hong Kong. At each financial period end,
judgement is required in determining the provision for income taxes. The Group recognises liabilities for anticipated tax issues based
on the best estimates at the balance sheet date.
Significant judgement is also required in determining the deferred tax on developer’s contributions, fair value losses and gains,
retirement benefit assets and liabilities and other provisions. The Group recognises deferred tax assets and liabilities based on the
best estimate at the balance sheet date.
Where the final tax outcome of the above matters is different from the amounts that were initially recorded, such differences will impact
the corporation tax and deferred tax provisions in the period in which such determination is made. The final outcome of some of these
tax items may give rise to material profit or loss and/or cash flow movements.
Share-based payments
The Group issues equity-settled share-based payments to certain employees. The fair value determined at the grant date is expensed
on a straight line basis over the vesting period. The fair value is calculated using the appropriate fair value model with the estimated level
of vesting being reviewed annually by management. The key assumptions of this model are set out in note 28.
Retirement benefits
The Group’s defined benefit schemes’ pension liability/asset, which is assessed each period by actuaries, are based on key assumptions
including return on plan assets, discount rates, mortality rates, inflation, future salary and pension costs. These assumptions,
individually or collectively, may be different to actual outcomes.
Other key assumptions for pension obligations are based in part on current market conditions; additional information relating to this
is disclosed in note 23.
Estimated useful life of property, plant and equipment
The Group estimates the useful life of property, plant and equipment and reviews this estimate at each financial period end. The Group
also tests for impairment whenever a trigger event occurs.
Inventories
Inventories are stated at the lower of cost and net realisable value using the retail method and represent goods for resale. This method
intrinsically takes into account any stock loss or mark down to goods sold below cost. Concession inventories are not included within
inventory held by the Group.
Debenhams plc Annual Report and Accounts 2012 89
Notes to the Financial Statements continued
6 Operating profit
The following items have been included in arriving at operating profit:
The amounts of inventory written down during the financial year
Cost of inventories recognised as an expense
Employment costs (note 7)
Depreciation of property, plant and equipment (note 14)
Amortisation of intangible assets (note 13)
Loss on disposal of property, plant and equipment
Operating lease rentals
Foreign exchange gains
Auditors’ remuneration
1 September
2012
£m
3 September
2011
£m
13.0
1,131.2
360.0
82.4
9.2
0.2
203.6
(14.8)
0.4
12.9
1,117.5
372.8
83.5
8.5
0.1
207.3
(12.7)
0.4
Services provided by the company’s auditor and network firms
During the financial year the Group obtained the following services from the Company’s auditor as detailed below:
Audit services
Fees payable to the Company’s auditor for the audit of the Parent Company and consolidated accounts
Other services
The audit of the Company’s subsidiaries pursuant to legislation
Fees payable to the Company’s auditor and its associates for other services
– Other services
1 September
2012
£m
3 September
2011
£m
0.2
0.1
0.1
0.2
0.1
0.1
Other services comprise advisory work relating to indirect taxation £0.1 million (2011: advisory work relating to indirect taxation
of £0.1 million) and £38,000 (2011: £28,000) relating to the defined benefit pension scheme audits. It is cost effective for the Group
that such services are provided by its auditors in view of their knowledge of the Group’s affairs.
90 Debenhams plc Annual Report and Accounts 2012
7 Employees
Wages and salaries
Social security costs
Pension cost
Share-based payments (note 28)
Total employment costs
Average number of employees (including key management):
– Full time
– Part time
Total
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1 September
2012
£m
336.1
21.9
0.4
1.6
360.0
3 September
2011
£m
337.6
22.6
11.2
1.4
372.8
Number
Number
8,355
21,762
30,117
8,735
21,889
30,624
Information concerning directors’ remuneration, interest in shares and share options is included in the remuneration report on pages
66 to 74, which forms part of these financial statements.
Key management compensation
Salaries and short-term benefits
Post-employment benefits
Share-based payments
Termination payments
1 September
2012
£m
2.8
0.5
0.5
1.0
4.8
3 September
2011
£m
4.0
0.6
0.4
–
5.0
Members of the executive committee (which includes the executive directors) and the non-executive directors are deemed to be key
management. It is the board who has responsibility for planning and controlling the activities of the Group. During the financial year
key management consisted of 12 members (2011: 13 members).
8 Finance income
Interest on bank deposits
Other financing income
9 Finance costs
Bank loans and overdrafts
Cash flow hedges reclassified and reported in net profit
Amortisation of issue costs on loans (note 20)
Interest payable on finance leases
Other financing charges
1 September
2012
£m
0.1
1.1
1.2
1 September
2012
£m
11.7
2.0
2.9
0.1
1.2
17.9
3 September
2011
£m
0.6
3.3
3.9
3 September
2011
£m
16.2
4.7
5.8
–
0.6
27.3
Debenhams plc Annual Report and Accounts 2012 91
Notes to the Financial Statements continued
10 Taxation
Analysis of tax charge in the financial year
Current tax:
UK corporation tax charge on profit for the financial year
Adjustments in respect of prior periods
Current tax expense
Deferred taxation:
Origination and reversal of temporary differences
Pension cost relief in excess of pension charge
Adjustments in respect of prior periods
Deferred tax credit (note 24)
Tax charge for the financial year
1 September
2012
£m
3 September
2011
£m
43.4
(8.9)
34.5
(3.8)
2.9
(0.6)
(1.5)
33.0
58.4
(1.6)
56.8
(13.0)
0.2
(0.9)
(13.7)
43.1
The effective tax rate for the financial year is lower at 20.8% (2011: lower at 26.9%) than the rate of corporation tax in the UK of 25.2%
(2011: 27.2%). The differences are explained below:
Profit on ordinary activities before tax
Profit on ordinary activities at standard rate of corporation tax in the UK of 25.2% (2011: 27.2%)
Effects of:
Permanent differences
Overseas tax rates
Utilisation of tax losses
Non-qualifying depreciation and lease transactions
Effect on deferred taxation of the change in corporation tax rate
Adjustments in relation to prior periods
Tax charge for the financial year
1 September
2012
£m
158.3
3 September
2011
£m
160.3
39.9
43.6
4.0
1.5
(3.1)
0.4
(0.2)
(9.5)
33.0
0.8
0.8
(2.3)
3.5
(0.8)
(2.5)
43.1
The Finance Act 2012, which became substantially enacted on 3 July 2012, included legislation reducing the main rate of corporation
tax from 26% to 24% from 1 April 2012 and also reducing the main rate of corporation tax from 24% to 23% from 1 April 2013. A further
reduction to the main rate is proposed to reduce the rate to 22% by 1 April 2014. This further change has not been substantially enacted
at the balance sheet date and is therefore not included in these financial statements.
The effect of the reduction in the corporation tax rate enacted in the Finance Act 2012 has been to reduce the net deferred tax asset
recognised at 3 September 2011 by approximately £0.1 million. This £0.1 million decrease has been recognised in line with the treatment
of the assets and liabilities giving rise to the net deferred tax asset.
The proposed reduction of the main rate of corporation tax to 22% from 1 April 2014 is expected to be enacted separately next year.
The overall effect of the further change from 23% to 22%, if applied to the deferred tax balances at 1 September 2012, would be to reduce
the net deferred tax asset by approximately £0.8 million.
92 Debenhams plc Annual Report and Accounts 2012
11 Dividends
Final paid 2.0 pence (2011: nil pence) per £0.0001 share
– Settled in cash
Interim paid 1.0 pence (2011: 1.0 pence) per £0.0001 share
– Settled in cash
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1 September
2012
£m
3 September
2011
£m
25.6
12.9
38.5
–
12.9
12.9
A final dividend of 2.0 pence per share (2011: nil pence per share) was paid during the financial year in respect of the financial year ended
3 September 2011, together with an interim dividend of 1.0 pence per share (2011: 1.0 pence per share) in respect of the financial year
ended 1 September 2012. The directors are proposing a final dividend in respect of the financial year ended 1 September 2012 of
2.3 pence per share (2011: 2.0 pence per share), which will absorb an estimated £29.0 million (2011: £25.6 million) of shareholders’
funds. It will be paid on 11 January 2013 to shareholders who are on the register of members at close of business on 7 December 2012.
No liability is recorded in the financial statements in respect of the final dividend as it was not approved as at the balance sheet date.
12 Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of ordinary shares outstanding during the financial year, excluding any shares purchased by the Company and held as treasury shares.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive
potential ordinary shares. The Group has one class of dilutive potential ordinary shares, those share options granted to employees where
the exercise price is less than the market price of the Company’s ordinary shares during the financial year.
Basic and diluted earnings per share
Profit for the financial year after taxation
Weighted average number of shares
Shares held by ESOP (weighted)
Shares issuable (weighted)
Adjusted weighted average number of shares
Earnings per share
1 September 2012
3 September 2011
Basic
£m
125.3
Number
m
1,282.0
(0.7)
–
1,281.3
Diluted
£m
125.3
Number
m
1,282.0
(0.7)
1.4
1,282.7
Pence
per share
9.8
Pence
per share
9.8
Basic
£m
117.2
Number
m
1,286.8
(0.3)
–
1,286.5
Pence
per share
9.1
Diluted
£m
117.2
Number
m
1,286.8
(0.3)
0.6
1,287.1
Pence
per share
9.1
Debenhams plc Annual Report and Accounts 2012 93
Notes to the Financial Statements continued
13 Intangible assets
Cost
At 28 August 2010
Additions
Exchange rate movement
Disposals
At 3 September 2011
Additions
Exchange rate movement
Disposals
At 1 September 2012
Accumulated amortisation
At 28 August 2010
Charge for the financial year
Exchange rate movement
Disposals
At 3 September 2011
Charge for the financial year
Exchange rate movement
Disposals
At 1 September 2012
Net book value
At 1 September 2012
At 3 September 2011
At 28 August 2010
Acquired
licences and
trademarks
£m
Internally
generated
software
£m
Purchased
software
£m
Goodwill
£m
818.7
–
0.5
–
819.2
–
(0.7)
–
818.5
–
–
–
–
–
–
–
–
–
818.5
819.2
818.7
7.2
–
–
–
7.2
–
–
–
7.2
0.9
0.7
–
–
1.6
0.7
–
–
2.3
4.9
5.6
6.3
55.1
16.2
0.1
(0.1)
71.3
14.6
(0.9)
(0.7)
84.3
34.2
6.8
(0.4)
(0.1)
40.5
7.2
(0.2)
(0.7)
46.8
37.5
30.8
20.9
6.2
3.2
–
–
9.4
2.8
–
(0.1)
12.1
5.9
1.0
–
–
6.9
1.3
–
(0.1)
8.1
4.0
2.5
0.3
Total
£m
887.2
19.4
0.6
(0.1)
907.1
17.4
(1.6)
(0.8)
922.1
41.0
8.5
(0.4)
(0.1)
49.0
9.2
(0.2)
(0.8)
57.2
864.9
858.1
846.2
Expenditure during the financial year on assets in the course of construction, included primarily in software, was as follows:
Assets in the course of construction
1 September
2012
£m
9.1
3 September
2011
£m
9.8
Amortisation of Intangible Assets
Amortisation on the Group’s intangible assets has been charged to the income statement as follows for the financial years ended:
Included within:
– Cost of sales
– Distribution costs
– Administrative expenses
Intangible assets includes the following assets held under finance leases:
Cost
Accumulated depreciation
Net book value
94 Debenhams plc Annual Report and Accounts 2012
1 September
2012
£m
3 September
2011
£m
7.7
0.2
1.3
9.2
7.2
0.2
1.1
8.5
Purchased Software
1 September
2012
£m
1.5
(0.8)
0.7
3 September
2011
£m
1.4
(0.3)
1.1
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13 Intangible assets continued
Impairment test for goodwill
Goodwill is not amortised but is reviewed on an annual basis or more frequently if there are indications that goodwill may be impaired.
Goodwill represents the goodwill for a portfolio of sites, which has been allocated to groups of cash-generating units (“CGUs”) split on a
regional basis according to the level at which management monitors that goodwill. This allocation was primarily undertaken subsequent
to the acquisition in December 2003 of the Debenhams stores by Debenhams plc. The CGUs are set out below:
Goodwill
North
£m
159.3
Midlands
£m
184.3
South-East
£m
180.1
South-West
£m
185.3
South
£m
102.8
Other
£m
6.7
Total
£m
818.5
For the purposes of this impairment review, the recoverable amounts of the CGUs are determined based on value-in-use calculations.
These cash flow projections are based on financial budgets approved by management covering a five year period. The key assumptions
used in these projections are sales growth and discount rates. The five year plan is built up using management’s previous experience and
incorporates management’s view of current economic conditions and trading expectations. Cash flows beyond the five year period are
extrapolated based on the assumption of 2% growth after year five. The growth rates do not exceed the long-term average growth rate
for the retail sector in which the CGUs operate. The pre-tax discount rate used to calculate the value-in-use was 8.2% (2011: 8.9%) and
reflects the specific risks in the retail business.
Management determined the gross margin for each CGU based on performance of individual stores and its expectations for the market
development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates
used are pre-tax and risk-free rates. Based on the value-in-use calculations, there is substantial headroom on a region by region basis and
a reasonably possible change in the assumptions used would not cause an impairment to goodwill.
As a result of the impairment review, as at 1 September 2012 no impairment of goodwill has been required (2011: nil).
Debenhams plc Annual Report and Accounts 2012 95
Notes to the Financial Statements continued
14 Property, plant and equipment
Cost
At 28 August 2010
Additions
Exchange rate movements
Disposals and write-offs
At 3 September 2011
Additions
Exchange rate movements
Disposals and write-offs
At 1 September 2012
Accumulated depreciation
At 28 August 2010
Charge for the financial year
Exchange rate movements
Disposals and write-offs
Reclassification
At 3 September 2011
Charge for the financial year
Exchange rate movements
Disposals and write-offs
At 1 September 2012
Net book value
At 1 September 2012
At 3 September 2011
At 28 August 2010
Land and buildings
Freehold
£m
Long-
leasehold
£m
Short-leasehold
fixtures and
fittings
£m
Vehicles, fixtures
and equipment
£m
50.6
–
–
(49.0)
1.6
–
–
–
1.6
2.1
–
–
(1.9)
–
0.2
–
–
–
0.2
1.4
1.4
48.5
11.5
0.3
–
(5.1)
6.7
0.4
–
–
7.1
1.5
0.1
–
(1.0)
–
0.6
0.1
–
–
0.7
6.4
6.1
10.0
339.1
11.7
0.6
–
351.4
2.8
(1.3)
(0.3)
352.6
83.2
14.7
0.1
–
(0.2)
97.8
14.9
(0.3)
(0.3)
112.1
240.5
253.6
255.9
776.3
82.7
4.4
(45.1)
818.3
110.2
(7.4)
(39.0)
882.1
414.6
68.7
2.1
(40.8)
0.2
444.8
67.4
(4.6)
(38.8)
468.8
413.3
373.5
361.7
Total
£m
1,177.5
94.7
5.0
(99.2)
1,178.0
113.4
(8.7)
(39.3)
1,243.4
501.4
83.5
2.2
(43.7)
–
543.4
82.4
(4.9)
(39.1)
581.8
661.6
634.6
676.1
96 Debenhams plc Annual Report and Accounts 2012
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14 Property, plant and equipment continued
Expenditure during the financial year on assets in the course of construction included primarily in vehicles, fixtures and equipment was
as follows:
Assets in the course of construction
Property, plant and equipment includes the following assets held under finance leases:
Cost
Accumulated depreciation
Net book value
Contractual commitments at 1 September 2012 were £14.9 million (2011: £5.3 million).
15 Financial assets – available-for-sale investments
At 28 August 2010
Disposals
Decrease in the market value charged to the statement of comprehensive income
At 3 September 2011
Decrease in the market value charged to the statement of comprehensive income
At 1 September 2012
1 September
2012
£m
49.9
3 September
2011
£m
39.3
Vehicles, fixtures
and equipment
1 September
2012
£m
10.7
(3.5)
7.2
3 September
2011
£m
5.0
(3.4)
1.6
£m
7.8
(5.0)
(0.2)
2.6
(0.7)
1.9
The Group holds 10% (2011: 10%) of the issued shares of Ermes Department Stores Limited (“Ermes”), a company listed on the Cyprus
Stock Exchange. The market value of the shares at 1 September 2012 was £1.9 million (2011: £2.6 million). Ermes is a company that is
registered and trades in Cyprus and its shares are quoted in euros.
During the financial year ended 3 September 2011 the Group disposed of its “A” ordinary shares of BF Properties (No.4) Limited for their
fair value of £5.0 million. The original cost of this investment was £3.0 million and accordingly £2.0 million profit was recycled from
other reserves to the income statement.
Debenhams plc Annual Report and Accounts 2012 97
Notes to the Financial Statements continued
16 Inventories
Items held for resale
17 Trade and other receivables
Non-current
Other receivables
Other receivables include contractual lease deposits of £15.5 million (2011: £17.1 million).
Current
Trade receivables
Allowance for doubtful debts
Other receivables
Prepayments and accrued income
1 September
2012
£m
332.3
3 September
2011
£m
321.3
1 September
2012
£m
3 September
2011
£m
19.3
18.3
1 September
2012
£m
3 September
2011
£m
21.4
(0.5)
20.9
2.3
52.2
75.4
22.7
(0.2)
22.5
1.3
48.3
72.1
At the year-end, £19.1 million (2011: £20.0 million) of the trade receivables are denominated in sterling, £0.2 million (2011: £0.3 million)
are denominated in euros and £2.1 million (2011: £2.4 million) in Danish kroner.
The movement in the allowance for doubtful debts may be analysed as follows:
At 28 August 2010
Increase in provision
At 3 September 2011
Increase in provision
At 1 September 2012
£m
(0.1)
(0.1)
(0.2)
(0.3)
(0.5)
Trade receivables which are past their due date but not impaired amount to £4.0 million (2011:£4.5 million). Trade receivables which
are past their due date are provided based on estimated irrecoverable amounts from the sale of goods. At 1 September 2012, £0.5 million
(2011: £0.2 million) of trade receivables were past their due date and impaired.
18 Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
1 September
2012
£m
28.7
15.3
44.0
3 September
2011
£m
23.7
5.3
29.0
98 Debenhams plc Annual Report and Accounts 2012
19 Trade and other payables
Trade payables
Other payables
Taxation and social security
Accruals
Deferred income
20 Bank overdraft and borrowings
Current
Bank overdraft
Term loan facility
Revolving credit facility(1)
Lease obligations
Non-current
Term loan facility(2)
Lease obligations
Overview
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1 September
2012
£m
318.3
65.3
24.7
115.0
2.1
525.4
3 September
2011
£m
286.9
68.0
26.9
106.1
1.2
489.1
1 September
2012
£m
3 September
2011
£m
9.4
–
151.8
2.2
163.4
244.8
4.5
249.3
6.2
0.1
160.5
1.3
168.1
243.2
1.4
244.6
(1) Revolving credit facility is stated net of unamortised issue costs of £3.2 million (2011: £4.5 million)
(2) Term loan facility is stated net of unamortised issue costs of £5.2 million (2011: £6.8 million)
The Group has a £650.0 million credit facility comprising a term loan of £250.0 million and a Revolving Credit Facility (“RCF”) of
£400.0 million. These facilities expire in October 2015, with an option to extend further to October 2016. At 1 September 2012 the
Group’s facilities outstanding comprised the term loan of £250.0 million (2011: £250.0 million) and RCF drawings of £155.0 million
(2011: £165.0 million).
In November 2010 the Group cancelled its existing term loan and RCF and drew down on its new £650.0 million credit facility.
During the current and prior financial years the Group has complied with its covenants relating to its credit facilities.
Issue costs, which mainly relate to facility costs, are being amortised over the term of the facilities to October 2015 at the effective
interest rate based on the committed amount of the term loan. The total amortisation charge relating to the issue costs of the Group’s
credit facilities cancelled and current for the financial year ended 1 September 2012 was £2.9 million (2011: £5.8 million).
Debenhams plc Annual Report and Accounts 2012 99
Notes to the Financial Statements continued
20 Bank overdraft and borrowings continued
Finance lease obligations
Finance lease obligations relate mainly to information technology systems, print machinery and vehicles leased under hire
purchase contracts.
The minimum lease payments under finance leases fall due as follows:
Not later than one year
Later than one year but not later than five years
Interest element of future instalments
Present value of finance lease obligations
The present value of finance lease obligations may be analysed as follows:
Not later than one year
Later than one year but not later than five years
Maturity of borrowings
The maturities of the Group’s borrowings at carrying value are as follows:
Amounts falling due:
In one year or less or on demand
In more than one year but not more than two years
In more than two years but not more than five years
Interest rates
The effective interest rates at the balance sheet dates were as follows:
Bank overdraft
Term loan facility
Revolving credit facility
Lease obligations
1 September
2012
£m
2.4
4.7
7.1
(0.4)
6.7
1 September
2012
£m
2.2
4.5
6.7
3 September
2011
£m
1.3
1.4
2.7
–
2.7
3 September
2011
£m
1.3
1.4
2.7
1 September
2012
£m
3 September
2011
£m
163.4
1.7
247.6
412.7
168.1
0.9
243.7
412.7
1 September
2012
%
1.88
2.29
2.29
3.57
3 September
2011
%
1.88
2.64
2.51
2.80
100 Debenhams plc Annual Report and Accounts 2012
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21 Financial risk management
a) Financial risks and treasury management
The Group conducts its Treasury activities within the remit of a Treasury Policy, which outlines approved policies, procedures and
authority levels. The board delegates its responsibility for reviewing and approving Treasury Policy to the Audit Committee. Reports
are prepared monthly covering all areas of treasury activity and policy compliance and are reviewed by the Chief Financial Officer.
The board and Audit Committee receive regular reporting covering treasury activities and policy compliance. Group Treasury manages
the Group’s funding requirements and financial risks in line with the agreed treasury policies and procedures.
The Group’s financial instruments, other than derivatives, primarily include borrowings, cash and liquid resources, available-for-sale
assets, trade receivables and trade payables. The main purpose of these financial instruments is to manage liquidity or raise finance
for the Group.
Group Treasury uses derivative financial instruments to manage its interest rate risks associated with the Group’s financing and
currency risk arising from the Group’s operations. The derivatives used are mainly interest rate swaps and forward currency contracts.
The Group’s activities expose it to a variety of financial risks, which include:
• Funding and liquidity risk
• Credit risk
• Foreign exchange risk
• Interest rate risk
• Other price risk
The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential
adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.
The policies and strategies for managing these risks are summarised as follows:
i) Funding and liquidity risk
Prudent liquidity risk management implies sufficient cash and marketable securities, the availability of funding through an adequate
amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying
business, Group Treasury aims to maintain flexibility in funding by keeping committed credit lines available.
The Group finances its operations by a combination of retained profits, debt finance and leases. The objective is to ensure that there
is a sufficient cash or working capital facility to meet the cash flow requirements of the Group for its current business plan.
The table below shows the maturity analysis of the Group’s net contractual undiscounted cash flows in respect of non-derivative
financial liabilities and derivative assets and liabilities at the balance sheet date.
At 1 September 2012
Non-derivative financial liabilities:
Borrowings
Interest payments due on borrowings
Finance lease liabilities
Trade and other payables
Derivative financial assets and liabilities:
Interest rate swaps
– Net settled derivative contracts – payments
Forward foreign exchange contracts
– Gross settled derivative contracts – receipts
– Gross settled derivative contracts – payments
Total
Less than
one year
£m
One to
two years
£m
Two to
five years
£m
More than
five years
£m
(164.4)
(5.7)
(2.4)
(473.1)
–
(5.7)
(1.8)
–
(250.0)
(6.7)
(1.7)
–
(3.0)
(2.5)
(2.3)
373.2
(367.6)
(643.0)
131.6
(130.9)
(9.3)
–
–
(260.7)
–
–
(1.2)
–
–
–
–
(1.2)
Debenhams plc Annual Report and Accounts 2012 101
Notes to the Financial Statements continued
21 Financial risk management continued
a) Financial risks and treasury management continued
i) Funding and liquidity risk continued
At 3 September 2011
Non-derivative financial liabilities:
Borrowings
Interest payments due on borrowings
Finance lease liabilities
Trade and other payables
Derivative financial assets and liabilities:
Interest rate swaps
– Net settled derivative contracts – payments
Forward foreign exchange contracts
– Gross settled derivative contracts – receipts
– Gross settled derivative contracts – payments
Total
Less than
one year
£m
One to
two years
£m
Two to
five years
£m
More than
five years
£m
(165.0)
(0.1)
(1.3)
(433.4)
–
–
(0.9)
–
(250.0)
–
(0.5)
–
(2.3)
(2.0)
(2.5)
332.8
(340.3)
(609.6)
121.8
(121.4)
(2.5)
–
–
(253.0)
–
–
–
–
–
–
–
–
ii) Credit risk
Credit risk is the risk that the Group may suffer financial loss through default by customers or financial institutions. The Group has
no significant concentrations of credit risk. Sales to retail customers are made in cash or by credit and debit cards, wholesale sales of
products to franchisees are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are
limited to high credit-quality financial institutions. The Group has policies that limit the amount of credit exposure to any one financial
institution. The Group’s policy requires that cash surpluses are placed on deposit for no longer than three months and only with
counterparties with a credit rating of A- or A3 or higher as assigned by Standard & Poor’s or Moody’s respectively. Exceptions to this
policy require board approval. The carrying amount of financial assets recorded in the financial statements net of any provision for
losses represents the Group’s maximum exposure to credit risk.
iii) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with
respect to the US dollar, the euro, the Chinese yuan and to a lesser extent the Danish krone.
To manage the foreign exchange transaction risk, entities in the Group use forward currency contracts transacted by Group Treasury.
Foreign exchange risk arises when commercial transactions are denominated in a currency that is not the entity’s functional currency.
Group Treasury is responsible for managing the exposure in each foreign currency by using external forward currency contracts with a
settlement of up to two years. Forecast cash flows are hedged to the extent that those cash flows are deemed highly probable. The Group
regularly reviews the need to hedge foreign exchange exposure arising from the profits, assets and liabilities of its non-sterling
businesses, hedging those exposures to the extent that they are considered appropriate for hedging.
A gain of £1.9 million (2011: loss of £1.8 million) was reclassified from equity to the income statement within cost of sales during the year
in respect of forward foreign exchange contracts designated as cash flow hedges.
The notional value of open forward foreign exchange contracts at 1 September 2012 was £503.7 million (2011: £461.1 million). The net fair
value gains on open forward foreign exchange contracts at 1 September 2012 are £5.0 million (2011: losses of £4.2 million). This will be
recycled and adjusted against the initial measurement of the acquisition cost of inventory over the next two years.
During the current and prior financial years there were no contracts reclassified to “held for trading” due to cash flow hedges
being ineffective.
iv) Interest rate risk
The Group’s interest rate risk arises from long-term borrowings. The Group’s current borrowing facilities are issued at variable rates that
expose the Group to cash flow interest rate risk.
The interest exposure of the Group is managed within the constraints of the Group’s business plan and the financial covenants under
its facilities. The aim is to reduce exposure to interest rate movements and to take advantage of low interest rates by hedging an
appropriate amount of interest rate exposure whilst maintaining the flexibility to minimise early termination costs. The Group’s
interest rate hedging strategy is to achieve a target fixed percentage of 75%, with a 15% tolerance (60%-90%).
The impact of movements in interest rates is managed through the use of floating rate debt and interest rate swaps. These are usually
matched with specific loans for a period of time up to their maturity or call date.
The Group’s main interest rate exposure is from the floating rate loans under the credit facilities. At the year end the Group’s hedged
borrowings amounted to £330.0 million (2011: £327.5 million), being 78.3% (2011: 78.4%) of the Group’s total borrowings.
102 Debenhams plc Annual Report and Accounts 2012
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21 Financial risk management continued
a) Financial risks and treasury management continued
iv) Interest rate risk continued
Interest rate swaps
The Group’s interest rate swaps switch interest from floating rates to fixed rates. The Group’s interest rate swap portfolio is summarised
as follows:
Interest rate swaps
Notional
£m
330.0
Rate
%
0.84% - 1.865%
Maturity
31 October 2015
The notional principal amount of interest rate swaps at 1 September 2012 was £330.0 million (2011: £327.5 million). The net gains and
losses on these swaps, which are deferred in equity, will reverse through interest in the income statement over the life of the swaps.
During the financial year a loss of £2.0 million (2011: £4.7 million) was reclassified and reported in the income statement in respect
of interest rate swaps.
Financial liabilities and assets
The interest rate profiles of financial liabilities after taking account of interest rate swaps, swapped from floating to fixed rates, used
to manage interest were as follows:
Financial liabilities
Sterling(1)
1 September 2012
Floating
£m
Fixed
£m
Total
£m
3 September 2011
Floating
£m
Fixed
£m
Total
£m
(336.7)
(84.4)
(421.1)
(330.3)
(93.7)
(424.0)
(1) Debt issue costs of £8.4 million (2011: £11.3 million) are excluded from the financial liabilities above
Fixed sterling financial liabilities comprise the hedged portion of the debt facility of £330.0 million and finance lease liabilities of
£6.7 million at 1 September 2012. The weighted average interest rate on the fixed rate borrowings as at 1 September 2012 was 3.3%
(2011: 3.6%), with the weighted average time for which rates are fixed being 3.2 years (2011: 4.2 years). Floating rate borrowings are
interest bearing at interest rates based on LIBOR. Cash deposits are interest bearing at rates based on LIBID or relevant base rates.
Non-interest bearing cash refers to cash in stores or in transit.
Floating rate borrowings have been classified as fixed if there were derivative financial instruments hedging the floating rate interest
for more than one year.
The interest rate profiles of financial assets were as follows:
Financial assets
Sterling
Euros
US dollars
Danish kroner
Chinese yuan
Other
Total financial assets
1 September 2012
Non-interest
bearing
£m
Floating
£m
Total
£m
Floating
£m
3 September 2011
Non-interest
bearing
£m
13.5
1.3
0.3
–
0.3
–
15.4
23.7
1.9
0.5
1.9
–
0.6
28.6
37.2
3.2
0.8
1.9
0.3
0.6
44.0
0.5
0.8
0.9
3.1
–
–
5.3
20.7
1.2
–
1.8
–
–
23.7
Total
£m
21.2
2.0
0.9
4.9
–
–
29.0
v) Other price risk
The Group is exposed to price risk arising from equity investments.
The sensitivity analysis below has been determined based on the exposure to equity price risk at the reporting date. At the year end,
if the market value had been 10% higher/lower, based on the Group’s view of reasonably possible changes to the value of the equity
investments, when all other variables were held constant:
• Net profit would have been unaffected as the equity investments were classified as available-for-sale investments; and
• Other reserves would decrease/increase by £0.2 million (2011: £0.3 million) for the Group as a result of the changes in the fair value
of available-for-sale investments.
Debenhams plc Annual Report and Accounts 2012 103
Notes to the Financial Statements continued
21 Financial risk management continued
b) Capital management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, provide returns for
shareholders and benefits to other stakeholders and to maintain a structure to optimise the cost of capital. The Group defines capital
as debt and equity.
In order to maintain or adjust the capital structure, the Group may consider: the amount of dividend paid to shareholders, the return
of capital to shareholders, the issue or sale of shares; or the sale of assets to reduce debt.
The Group routinely monitors its capital and liquidity requirements through leverage ratios consistent with industry-wide borrowing
standards, maintaining suitable headroom to bank facility fixed charge and leverage covenants together with credit market
requirements to ensure financing requirements continue to be serviceable.
c) Fair value estimates
The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward
currency contracts has been determined based on discounted market forward currency exchange rates at the balance sheet date.
The fair values of short-term deposits, loans and overdrafts with a maturity of less than one year are assumed to approximate to their
book values. In the case of the Group’s loans due in more than one year, the fair value of financial liabilities for disclosure purposes
is estimated by discounting the future contractual cash flows at the current market interest rates available to the Group.
There were no material differences between the carrying value of non-derivative financial assets and financial liabilities to their fair
values at the year end.
d) Sensitivity analysis
The Group monitors interest rate risk and foreign exchange risk by determining the effect on profit of a range of possible changes in
interest rates and foreign exchange rates. The range of sensitivities chosen, being 1% movement in the interest rate or 5% movement
in sterling when compared to US dollar, Chinese yuan, Danish krone and euro, reflects the Group’s view of reasonably possible changes
to these risk variables which existed at the year end.
The table below illustrates the estimated impact on the Group as a result of market movements in foreign exchange and interest rates
in relation to all the Group’s financial instruments. The analysis has been produced assuming no changes in the borrowings and existing
interest rate swaps portfolio when considering the interest rate movement. The table below illustrates the estimated impact on the
Group as a result of market movements in interest rates in relation to all the Group’s financial instruments that are expressed in
currencies different to that of the functional currency.
1% increase in interest rate
5% weakening in sterling compared to US dollar
5% weakening in sterling compared to the euro
5% weakening in sterling compared to Danish krone
5% weakening in sterling compared to Chinese yuan
1 September 2012
Income
statement
gain/(loss)
£m
(0.7)
Equity
gain/(loss)
£m
7.5
3 September 2011
Income
statement
gain/(loss)
£m
(0.9)
Equity
gain/(loss)
£m
6.3
1 September 2012
Income
statement
gain/(loss)
£m
0.1
(0.3)
(0.4)
–
Equity
gain/(loss)
£m
12.1
(2.4)
–
1.7
3 September 2011
Income
statement
gain/(loss)
£m
0.4
(0.4)
(0.2)
–
Equity
gain/(loss)
£m
11.8
(3.2)
–
–
A 1% decrease in interest rate or 5% strengthening in sterling compared to the US dollar, euro, Danish krone or Chinese yuan would
result in an equal and opposite change in the income statement and equity respectively.
104 Debenhams plc Annual Report and Accounts 2012
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22 Financial instruments
Financial assets and liabilities by category
Information regarding the Group’s financial risk management policies has been disclosed in note 21. All financial assets and liabilities
are held at amortised cost with the exception of derivative financial instruments and available-for-sale assets, which are held at fair
value. The following table sets out the classification and carrying value of each class of financial assets and liabilities within the
financial statements:
At 1 September 2012
Assets
Current assets
Cash and cash equivalents
Trade and other receivables
Forward foreign currency contracts
Non-current assets
Trade and other receivables
Available-for-sale financial assets
Forward foreign currency contracts
Liabilities
Current liabilities
Trade and other payables
Current borrowings
Forward foreign currency contracts
Non-current liabilities
Non-current borrowings
Interest rate swaps
Forward foreign currency contracts
Total
At 3 September 2011
Assets
Current assets
Cash and cash equivalents
Trade and other receivables
Forward foreign currency contracts
Non-current assets
Trade and other receivables
Available-for-sale financial assets
Interest rate swaps
Forward foreign currency contracts
Liabilities
Current liabilities
Trade and other payables
Current borrowings
Interest rate swaps
Forward foreign currency contracts
Non-current liabilities
Non-current borrowings
Interest rate swaps
Forward foreign currency contracts
Total
Available-
for-sale
£m
Held for
trading
£m
Derivatives
designated
as cash flow
hedges
£m
Loan
receivables
and financial
liabilities at
amortised cost
£m
–
–
–
–
1.9
–
–
–
–
–
–
–
1.9
–
–
–
–
2.6
–
–
–
–
–
–
–
–
–
2.6
–
–
1.2
–
–
–
–
–
(0.1)
–
–
–
1.1
–
–
0.2
–
–
–
–
–
–
–
(2.2)
–
–
–
(2.0)
–
–
6.6
–
–
0.8
–
–
(1.8)
–
(8.3)
(0.6)
(3.3)
–
–
1.0
–
–
0.1
1.3
–
–
(0.3)
(6.0)
–
(3.8)
(0.4)
(8.1)
44.0
23.2
–
19.3
–
–
(498.5)
(163.4)
–
(249.3)
–
–
(824.7)
29.0
23.8
–
18.3
–
–
–
(461.1)
(168.1)
–
–
(244.6)
–
–
(802.7)
Total
£m
44.0
23.2
7.8
19.3
1.9
0.8
(498.5)
(163.4)
(1.9)
(249.3)
(8.3)
(0.6)
(825.0)
29.0
23.8
1.2
18.3
2.6
0.1
1.3
(461.1)
(168.1)
(0.3)
(8.2)
(244.6)
(3.8)
(0.4)
(810.2)
Debenhams plc Annual Report and Accounts 2012 105
Notes to the Financial Statements continued
22 Financial instruments continued
Fair value measurement
The Group has adopted the amendment to IFRS 7 which requires financial instruments to be grouped into a fair value hierarchy
based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are:
• Level 1 – Quoted prices (unadjusted) based on active markets for identical assets or liabilities
• Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly
(that is, prices) or indirectly (that is, derived from prices)
• Level 3 – Inputs for the asset or liability that are not based on observable market data
The following table shows the Group’s financial assets and liabilities as measured at fair value at 1 September 2012:
Assets
Available-for-sale financial assets
Derivative financial instruments:
– Forward foreign currency contracts held as cash flow hedges
– Other forward foreign currency contracts
Total assets
Liabilities
Derivative financial instruments:
– Interest rate swaps held as cash flow hedges
– Forward foreign currency contracts held as cash flow hedges
– Other forward foreign currency contracts
Total liabilities
Level 1
£m
Level 2
£m
Level 3
£m
1.9
–
–
1.9
–
–
–
–
–
7.4
1.2
8.6
(8.3)
(2.4)
(0.1)
(10.8)
–
–
–
–
–
–
–
–
Total
£m
1.9
7.4
1.2
10.5
(8.3)
(2.4)
(0.1)
(10.8)
The following table shows the Group’s financial assets and liabilities as measured at fair value at 3 September 2011:
Assets
Available-for-sale financial assets
Derivative financial instruments:
– Interest rate swaps held as cash flow hedges
– Forward foreign currency contracts held as cash flow hedges
– Other forward foreign currency contracts
Total assets
Liabilities
Derivative financial instruments:
– Interest rate swaps held as cash flow hedges
– Forward foreign currency contracts held as cash flow hedges
– Other forward foreign currency contracts
Total liabilities
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
2.6
–
–
–
2.6
–
–
–
–
–
0.1
2.3
0.2
2.6
(4.1)
(6.4)
(2.2)
(12.7)
–
–
–
–
–
–
–
–
–
2.6
0.1
2.3
0.2
5.2
(4.1)
(6.4)
(2.2)
(12.7)
The Group disposed of its level 3 investment during the financial year 2011. For further details see note 15 to the financial statements.
106 Debenhams plc Annual Report and Accounts 2012
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23 Retirement benefit obligation
The Group operates defined benefit type pension schemes, being the Debenhams Executive Pension Plan (“DEPP”) and the
Debenhams Retirement Scheme (“DRS”) (together “the Group’s pension schemes”), the assets of which are held in separate
trustee-administered funds.
Both pension schemes were closed for future service accrual from 31 October 2006. The closure to future accrual will not affect
the pensions of those who have retired or the deferred benefits of those who have left service or opted out before 31 October 2006.
Future pension arrangements are provided through a money purchase stakeholder plan in the UK and Hong Kong or a defined
contribution scheme for the employees in the Republic of Ireland and Denmark.
In accordance with the recovery plan for the Group’s pension schemes, which is intended to restore the schemes to a fully funded
position on an ongoing basis, the Group agreed to contribute £5.8 million per annum from 1 April 2009 to 31 March 2011 increasing
by annual Retail Price Index (“RPI”) from the year to 31 December 2009 to fund past service benefits. The Group agreed to increase its
contributions to the Group’s pension schemes to £7.0 million per annum from 1 April 2011 until 31 August 2021, increasing by annual
RPI from the year to the previous December. The Group has also agreed to make a further increase in its contributions to the pension
schemes to £8.9 million per annum for the period from 1 April 2012 to 31 August 2022 increasing by the percentage increase in the
RPI over the year to the previous December.
Additionally, the Group has agreed to cover the non-investment expenses and levies of the pension schemes, including those payable
to the Pension Protection Fund.
If the Company had paid or declared a dividend during the period from 1 April 2009 to 31 March 2011, the Group would have made
further contributions of 3.1% and 1.9% of the total amount of the ordinary dividend to the DRS and DEPP respectively. No dividends
were declared by the Company during this period.
The investment strategy for the Group’s pension schemes was changed during the year ended 3 September 2011. Investment of the
schemes assets is now arranged by AON Hewitt Limited under a delegated consulting service agreement. As at 1 September 2012 most
of the schemes assets are invested in a delegated liability fund or a delegated growth fund, with some legacy holdings from the former
investment strategy due to be transferred to the delegated consulting service arrangement in the future.
Actuarial valuations of the Group’s pension schemes using the projected unit basis were carried out at 31 March 2011, and updated
as at each relevant year end for the purposes of IAS 19 “Employee Benefits” by Towers Watson Limited, a qualified independent actuary.
The 31 March 2011 actuarial valuation has been used when calculating the IAS 19 “Employee Benefits” valuation at 1 September 2012.
The major assumptions used by the actuary were:
Inflation assumption
General salary and wage increase
Rate of increase in pension payments and deferred payments
Pension increase rate
Discount rate
1 September
2012
per annum
%
2.90
2.90
2.90
2.80
4.70
3 September
2011
per annum
%
3.30
3.30
3.30
3.20
5.75
28 August
2010
per annum
%
3.20
3.20
3.20
3.10
5.00
The expected return on scheme assets is based on market expectations at the beginning of the year for return over the entire life of the
defined benefit obligation.
The inflation assumption is based on the RPI rate as pension increases both in payment and deferment within the schemes are set out
with reference to this measure.
1 September 2012
3 September 2011
28 August 2010
Assets
Delegated liability fund
Delegated growth fund
Legacy holdings
Equities
Bonds
Property
Cash and other assets
Total market value of assets
Present value of scheme liabilities
(Deficit)/surplus in scheme
Long-term
rate of return
expected
per annum
%
–
–
–
–
–
–
–
7.0-7.4
Long-term
rate of return
expected
per annum
%
–
–
–
–
–
–
–
7.8-8.1
£m
105.5
464.2
1.7
–
–
–
12.3
583.7
(641.0)
(57.3)
Long-term
rate of return
expected
per annum
%
–
–
–
8.2
5.0
7.3
3.8
6.6
£m
90.7
433.4
23.9
–
–
–
3.5
551.5
(547.6)
3.9
£m
–
–
–
247.0
244.9
20.3
11.6
523.8
(604.5)
(80.7)
Debenhams plc Annual Report and Accounts 2012 107
Notes to the Financial Statements continued
23 Retirement benefit obligation continued
The expected rates of return on assets for the schemes as at 1 September 2012 have been derived from the target returns specified in the
current Statement of Investment Principles for each scheme, and have been set at 7.0% (2011: 7.8%) for the DEPP and 7.4% (2011: 8.1%)
for the DRS. At previous year ends, prior to 3 September 2011, the expected rates of return on assets were derived as the weighted
average of the expected rates of return from each of the main asset classes.
Assumptions regarding future mortality experiences are based on the mortality tables shown below.
Debenhams Retirement Scheme
Debenhams Executive Pension Plan
1 September
2012
Male and
female
S1PMA_L+1
S1PFA_L+1
3 September
2011
Male and
female
PNMA00 +1
PNFA00 –2
The current life expectancies of a pensioner retiring aged 65 underlying the mortality tables for each of the schemes above are as follows:
Debenhams Retirement Scheme
Member currently aged 65
Member aged 65 in 15 years
Debenhams Executive Pension Plan
Member currently aged 65
Member aged 65 in 15 years
The actual return on scheme assets was as follows:
Return on scheme assets
The amounts recognised in the income statement are as follows:
Interest on pension scheme liabilities
Expected return on pension scheme assets
Total credit included within staff costs
The total credits included are as follows:
Cost of sales
Distribution costs
Administrative expenses
Total credit
Changes in the present value of the defined benefit obligations are as follows:
Present value of obligations at start of the financial year
Interest on pension scheme liabilities
Benefit payments by the fund
Actuarial losses/(gains)
Present value of obligations at end of the financial year
108 Debenhams plc Annual Report and Accounts 2012
1 September 2012
3 September 2011
Years
Male
22.4
23.4
Years
Female
24.3
25.4
Years
Male
21.4
22.3
1 September 2012
3 September 2011
Years
Male
24.4
25.4
Years
Female
25.8
26.9
Years
Male
24.0
24.8
Years
Female
23.2
24.0
Years
Female
25.8
26.5
1 September
2012
£m
42.4
3 September
2011
£m
38.6
1 September
2012
£m
30.9
(42.6)
(11.7)
3 September
2011
£m
29.8
(30.7)
(0.9)
1 September
2012
£m
(9.7)
(0.1)
(1.9)
(11.7)
1 September
2012
£m
547.6
30.9
(18.2)
80.7
641.0
3 September
2011
£m
(0.8)
–
(0.1)
(0.9)
3 September
2011
£m
604.5
29.8
(17.5)
(69.2)
547.6
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23 Retirement benefit obligation continued
Changes in the fair value of pension scheme assets are as follows:
Fair value of pension scheme assets at start of the financial year
Benefits paid
Company contributions
Expected return on pension scheme assets
Actuarial (losses)/gains
Fair value of pension scheme assets at end of the financial year
Movement in (deficit)/surplus during the financial year:
Surplus/(deficit) in the schemes at start of the financial year
Movement in the financial year:
– Pension credit
– Company contributions
– Net actuarial (losses)/gains
(Deficit)/surplus in the schemes at end of the financial year
Cumulative actuarial gains and losses recognised in the statement of comprehensive income:
At start of the financial year
Net actuarial (losses)/gains recognised in the financial year
Net actuarial losses recognised at end of the financial year
History of experience gains and losses:
1 September
2012
£m
551.5
(18.2)
9.4
42.6
(1.6)
583.7
3 September
2011
£m
523.8
(17.5)
7.9
30.7
6.6
551.5
1 September
2012
£m
3.9
3 September
2011
£m
(80.7)
11.7
9.4
(82.3)
(57.3)
0.9
7.9
75.8
3.9
1 September
2012
£m
(50.4)
(82.3)
(132.7)
3 September
2011
£m
(126.2)
75.8
(50.4)
Actuarial losses/(gains) arising on scheme assets:
– Amounts
– Percentage of scheme assets
Experience losses/(gains) arising on defined benefit
obligation:
– Amounts
– Percentage of the present value of scheme liabilities
Present value of scheme liabilities
Fair value of scheme assets
(Deficit)/surplus
1 September
2012
3 September
2011
28 August
2010
29 August
2009
30 August
2008
£1.6m
0.3%
£(6.6)m
(1.2)%
£(12.0)m
(2.3)%
£62.7m
12.8%
£55.7m
10.6%
£6.9m
1.1%
£(641.0)m
£583.7m
£(57.3)m
£(5.1)m
(0.9)%
£(547.6)m
£551.5m
£3.9m
£7.6m
1.3%
£(604.5)m
£523.8m
£(80.7)m
£(18.2)m
(3.4)%
£(542.0)m
£488.4m
£(53.6)m
£14.6m
2.9%
£(500.6)m
£525.6m
£25.0m
The contributions expected to be paid during the financial year ended 31 August 2013 amount to £10.5 million.
Other Debenhams defined contribution schemes
The Group contributions to other defined contribution schemes during the financial year were £12.0 million (2011: £11.8 million).
Debenhams plc Annual Report and Accounts 2012 109
Notes to the Financial Statements continued
24 Deferred tax assets and liabilities
Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 23% (2011: 25%) for the UK
differences and the local tax rates for overseas differences.
Non-current
Deferred tax assets
Deferred tax liabilities
1 September
2012
£m
3 September
2011
£m
83.2
(64.7)
18.5
75.7
(74.1)
1.6
Deferred tax assets have been recognised in respect of temporary differences giving rise to deferred tax assets because it is probable that
these assets will be recovered.
The movement on the deferred tax account is as shown below:
Assets
At 28 August 2010
Credited/(charged) to the income statement
Result of the change in the standard rate of corporation tax
charged to the income statement
Charged to the statement of comprehensive income
At 3 September 2011
(Charged)/credited to the income statement
Result of the change in the standard rate of corporation tax
charged to the income statement
Credited to the statement of comprehensive income
At 1 September 2012
Developer’s
contribution
received
£m
44.4
2.8
Fair value
losses
£m
4.8
–
Other
provisions
£m
21.0
7.9
Retirement
benefit
asset
£m
21.8
(0.2)
(3.2)
–
44.0
(6.8)
(2.9)
–
34.3
(0.4)
–
4.4
(2.4)
0.1
–
2.1
(1.6)
–
27.3
9.1
(2.8)
–
33.6
(0.1)
(21.5)
–
(2.9)
0.2
15.9
13.2
Liabilities
At 28 August 2010
Credited/(charged) to the income statement
Result of the change in the standard rate of corporation tax charged
to the income statement
Credited/(charged) to the statement of comprehensive income
At 3 September 2011
Credited to the income statement
Result of the change in the standard rate of corporation tax charged
to the income statement
(Charged)/credited to the statement of comprehensive income
At 1 September 2012
Accelerated
tax
depreciation
£m
(78.7)
2.8
Fair value
gains
£m
(5.1)
(0.6)
Retirement
benefit
liability
£m
–
–
5.9
–
(70.0)
1.8
5.4
–
(62.8)
0.4
2.2
(3.1)
2.7
–
(1.5)
(1.9)
–
(1.0)
(1.0)
–
–
1.0
–
Total
£m
92.0
10.5
(5.3)
(21.5)
75.7
(3.0)
(5.4)
15.9
83.2
Total
£m
(83.8)
2.2
6.3
1.2
(74.1)
4.5
5.4
(0.5)
(64.7)
Within other provisions is a deferred tax asset of £1.7 million (2011: £7.8 million) in relation to overseas operations which has been
recognised. In addition to this there is an unrecognised deferred tax asset of £11.5 million (2011: £15.8 million) relating to operations
in Denmark.
25 Other non-current liabilities
Other liabilities
1 September
2012
£m
321.9
3 September
2011
£m
318.9
Included within other liabilities are lease incentives received from landlords either through initial contributions or rent-free periods.
These incentives are being credited to the income statement on a straight line basis over the term of the relevant lease. Additionally,
the liability relates to the spreading of the charges relating to leases with fixed annual increments in rent.
110 Debenhams plc Annual Report and Accounts 2012
26 Provisions
At 28 August 2010
Charged to the income statement
Unused amounts reversed in the financial year
Utilised during the financial year
At 3 September 2011
Charged to the income statement
Unused amounts reversed in the financial year
Utilised during the financial year
At 1 September 2012
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Closure
provision
£m
0.1
–
–
–
0.1
–
–
–
0.1
Promotional
activities
£m
3.3
10.4
(2.9)
(6.0)
4.8
10.2
(4.5)
(5.7)
4.8
Restructuring
provision
£m
0.5
1.0
–
(0.8)
0.7
0.5
–
(1.2)
–
Other
provisions
£m
2.5
–
(0.1)
(0.6)
1.8
–
–
(0.3)
1.5
2
10
32
46
52
75
Total
£m
6.4
11.4
(3.0)
(7.4)
7.4
10.7
(4.5)
(7.2)
6.4
Provisions have been analysed between current and non-current as follows:
Current
Non-current
1 September
2012
£m
5.3
1.1
6.4
3 September
2011
£m
6.2
1.2
7.4
Closure provision
Relating to one vacated building which will be utilised over the term of the lease, being the next two years.
Promotional activities provision
Provisions for promotional activities represent the cost to the business of operating an internal cosmetics loyalty scheme and the
Debenhams Reward Scheme in the Republic of Ireland and they are expected to be utilised during the next 12 months.
Restructuring provision
This included provisions for redundancy and restructuring costs within the Republic of Ireland, Denmark and the UK.
Other provisions
The majority of the Group’s other provisions relate to dilapidations on properties based upon the directors’ best estimate of the Group’s
future liability. The remainder of the other provisions, none of which is individually significant, represent the best estimate of the
expenditure required to settle present obligations in respect of other liabilities. These provisions are expected to be utilised within
the next three years.
Debenhams plc Annual Report and Accounts 2012 111
Notes to the Financial Statements continued
27 Share Capital and Reserves
Issued and fully paid – Ordinary shares of £0.0001 each
At start and end of the financial year
1 September 2012
3 September 2011
£
Number
£
Number
128,680 1,286,806,299
128,680
1,286,806,299
During the financial year ended 1 September 2012, 23,559,155 (2011: nil) of the above shares were purchased by the Company and are
held as treasury shares. See retained earnings below.
Employee share trust – interest in share capital
The number of ordinary shares in the Company held by the DRET was as follows:
Debenhams Retail Employee Trust 2004
1 September
2012
Ordinary
shares
Number
723,536
3 September
2011
Ordinary
shares
Number
723,536
The market value of the shares on 1 September 2012 was £0.7 million for DRET (2011: £0.4 million). The cost of the shares held at the
year end is £0.6 million (2011: £0.6 million).
A description of the nature and purpose of each reserve is set out below:
Share premium account
On admission to the London Stock Exchange, the Company issued 358,974,359 shares at £1.95, generating proceeds of £700.0 million.
Costs directly associated with the issue of the new shares totalled £17.1 million and in accordance with the Companies Act these costs
were set off against the premium generated on issue of the new shares.
Merger reserve
The merger reserve of £1,200.9 million exists as a result of the 2005 Group reconstruction.
Reverse acquisition reserve
The reverse acquisition reserve exists as a result of the method of accounting for the 2005 Group reconstruction. In accordance with
International Accounting Standards, the 2005 Group reconstruction has been accounted for as a reverse acquisition.
Hedging reserve
The hedging reserve represents the change in fair value of all interest rate swaps and forward foreign currency contracts which have
been designated as cash flow hedges. The effective portion of the changes in fair value of derivatives that are designated and qualify
as cash flow hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the relevant
line of the income statement which will be affected by the underlying hedged item.
Other reserves
The other reserve represents the change in fair value in respect of the Group’s available-for-sale investments (see note 15) and exchange
differences arising as part of a reporting entity’s net investment in a foreign operation. Other reserves may be analysed as follows:
At 28 August 2010
Currency translation differences
Change in the fair value of available-for-sale investments
Sale of available-for-sale investments
At 3 September 2011
Currency translation differences
Change in the fair value of available-for-sale investments
At 1 September 2012
Change in
fair value of
available-for-sale
investments
£m
0.6
–
(0.2)
(2.0)
(1.6)
–
(0.7)
(2.3)
Translation
reserve
£m
(5.8)
4.3
–
–
(1.5)
(6.7)
–
(8.2)
Total
£m
(5.2)
4.3
(0.2)
(2.0)
(3.1)
(6.7)
(0.7)
(10.5)
Retained earnings
The Company acquired 23,559,155 of its own shares through purchases on the London Stock Exchange between 24 April 2012 and
7 August 2012. The total amount paid to acquire the shares net of income tax was £20.1 million. The shares are held as treasury shares.
The Company has the right to reissue these shares at a later date. All shares acquired by the Company were fully paid.
112 Debenhams plc Annual Report and Accounts 2012
28 Share-based payments
The total charge to operating profit relates to the following equity settled schemes:
Performance Share Plan (“PSP”)
Executive Share Option Plan (“ESOP”)
Share Incentive Plan (“SIP”)
Deferred Bonus Matching Plan (“DBMP”)
Charge for the financial year
Overview
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2
10
32
46
52
75
1 September
2012
£m
1.4
0.1
–
0.1
1.6
3 September
2011
£m
0.7
0.2
0.4
0.1
1.4
The following table reconciles the movement in shares awarded under the Company share schemes and the weighted average
exercise price (“WAEP”) for the ESOP scheme. Grants under the PSP, SIP and DBMP all comprise a right to acquire shares for no
or nominal consideration.
Outstanding at 28 August 2010
Granted
Exercised
Lapsed
Forfeited
Outstanding at 3 September 2011
Granted
Forfeited
Outstanding at 1 September 2012
DBMP
Number
–
849,130
–
–
(12,927)
836,203
–
(248,920)
587,283
SIP
Number
715,000
650,000
(690,000)
–
(25,000)
650,000
200,000
(400,000)
450,000
PSP
Number
5,382,579
191,250
–
(3,410,092)
–
2,163,737
5,947,558
(634,410)
7,476,885
ESOP
Number
2,414,374
–
–
(1,451,682)
–
962,692
–
(131,069)
831,623
WAEP Pence
95.1
–
–
103.0
–
85.5
–
85.5
85.5
i) The Debenhams Performance Share Plan
The PSP allows the company to grant awards of shares to senior management. An award under the PSP will normally vest on the third
anniversary of date of grant and must be exercised within six months of vesting. No payment is required for the grant of an award.
An award under the PSP comprises a right to receive free shares or a nil cost option with performance conditions attached.
Awards granted on 24 November 2009 and 23 May 2011
The vesting of the shares granted under these PSP awards is dependent on Earnings Per Share (“EPS”) growth.
Where growth is less than 6% per annum over the three year period, the awards lapse. Where growth is 6% per annum, 30%
of the shares awarded vest, where growth is 10% per annum, awards vest in full. Between these two points, awards vest on a straight
line basis between 30% and 100%.
Awards granted on 1 November 2011 and 1 May 2012
The vesting of the shares granted under these awards is dependent upon the growth of both EPS and Return on Capital
Employed (“ROCE”).
75% of the awards is based upon EPS growth. Where growth is less than 6% per annum over the three year period, this element of the
awards lapse. Where growth is 6% per annum, 30% of the shares awarded vest, where growth is 12% per annum, the EPS element of the
awards vest in full. Between these two points, awards vest on a straight line basis between 30% and 100%.
The remaining 25% of the awards is dependent upon ROCE. If average ROCE is below the cost of capital over the three year period, this
element of the awards lapse. If average ROCE is equal to the cost of capital over the three year period, then 30% of the shares awarded
vest. If average ROCE is equal to the cost of capital plus 5% then the ROCE element of the awards vest in full. Between these two points,
awards vest on a straight line basis between 30% and 100%.
Debenhams plc Annual Report and Accounts 2012 113
Notes to the Financial Statements continued
28 Share-based payments continued
i) The Debenhams Performance Share Plan continued
Awards granted on 1 November 2011 and 1 May 2012 continued
In accordance with IFRS 2 “Share-Based Payments”, the vesting conditions attached to the PSP are classified as non-market conditions
and therefore the shares have been fair valued at face value with a discount to take into account the non-entitlement to dividends in the
vesting period where relevant. The fair value of these PSP awards is calculated based on a Black-Scholes model assuming the inputs
shown in the table below:
Grant date
Number of shares under award (number)
Expected term (years)
Share price at grant (pence)
Exercise price (pence)
Risk free rate
Expected volatility
Expected dividend yield
Fair value of award (pence)
1 May
2012
391,987
3.0
84.0
–
0%
40%
3.5%
75.0
1 November
2011
5,137,864
3.0
64.0
–
0%
40%
7.4%
59.0
23 May
2011
191,250
3.0
72.0
–
0%
N/A
5.0%
62.0
24 November
2009
1,755,784
3.0
83.3
–
2.3%
70.0%
0%
83.3
Where volatility has been used in the calculation of fair value it has been estimated by taking the historical volatility in the Company’s
share price.
ii) Executive Share Option Plan
The ESOP allows the Company to grant options to acquire shares to eligible employees. These options will normally become exercisable
following a three year performance period, only if and to the extent that the performance conditions to which they are subject have been
satisfied. Once the options have vested, the employees have a seven year period in which to exercise. Options are granted with
an exercise price equal to the middle market value of the shares on the day immediately preceding the date of grant.
Options granted on 24 November 2009
The vesting of options granted under this plan is dependent on the Company’s ROCE exceeding the cost of capital. Where the ROCE is
less than or equal to the cost of capital over a three year period, no options will vest. Where the ROCE is greater than the cost of capital,
30% will vest, where the ROCE is greater than the cost of capital plus 5%, 100% will vest. Between these two points the options will vest
on a straight line basis between 30% and 100%. The fair value of the share options has been calculated using a Black-Scholes model.
The key assumptions are set out in the table below.
Grant date
Number of shares under option (number)
Expected term (years)
Share price at grant (pence)
Exercise price (pence)
Risk free rate
Expected volatility
Expected dividend yield
Fair value of option (pence)
24 November
2009
831,623
3.0
85.5
85.5
2.3%
70.0%
0%
40.7
Volatility has been estimated by taking the historical volatility in the Company’s share price.
The weighted average exercise price of the ESOP at 1 September 2012 was 85.5 pence (2011: 85.5 pence).
iii) Share incentive plan
The SIP allows the Company to grant options to key senior managers below board level, whom the Company wishes to retain
and incentivise in the short to medium term. Once the options have vested the employee has six months in which to exercise.
114 Debenhams plc Annual Report and Accounts 2012
Overview
Strategy review
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Accounts
2
10
32
46
52
75
28 Share-based payments continued
iii) Share incentive plan continued
Options granted on 16 November 2010 and 21 May 2012
The options granted on 16 November 2010 and on 21 May 2012 have 24 month and 30 month vesting periods respectively, based on
the employee’s continued employment and performance targets specific to the employee’s role within the business, and are granted
with no exercise price.
The fair value of the SIP options granted is calculated based on a Black-Scholes model assuming the inputs shown below:
Grant date
Number of shares under option (number)
Expected term (years)
Share price at grant (pence)
Exercise price (pence)
Risk free rate
Expected volatility
Expected dividend yield
Fair value of option (pence)
21 May
2012
200,000
2.5
80.0
–
0%
40.0%
3.8%
73.0
16 November
2010
250,000
2.0
70.0
–
0%
100.0%
5.0%
63.3
The option over 150,000 shares granted under the SIP on 23 May 2011 was forfeited.
iv) Deferred Bonus Matching Plan
The DBMP allows the Company to invite eligible employees to invest up to 100% of their net annual bonus earned into shares (“invested
shares”). If the participant remains in service for three years and retains the beneficial ownership of all the invested shares s/he will,
subject to the satisfaction of certain performance conditions be entitled to a matching share award equal to the amount of the pre-tax
bonus that has been invested. Once the options have vested they will be released to the employee within one month of the vesting date.
Debenhams plc Annual Report and Accounts 2012 115
Notes to the Financial Statements continued
28 Share-based payments continued
iv) Deferred Bonus Matching Plan continued
Options granted on 26 November 2010
All bonus eligible employees were offered the opportunity to invest up to 50% of their 2010 bonus into invested shares. The entitlement
to the matching award is subject to the participant retaining beneficial ownership of their invested shares during the performance period
and to the achievement of the following performance conditions. The Group’s ROCE must exceed the cost of capital by 2% over this
period otherwise the options will not vest. The Group’s EPS growth must then exceed 6% per annum over the three year period or the
options will not vest. If the Group’s EPS growth is 6% or more per annum over the three year period 30% of the options will vest; if the
growth is 12% or more per annum over the three year period, 100% of the options will vest. Between these two points the options will
vest on a straight line basis between 30% and 100%.
The fair value of the DBMP options granted is calculated based on a Black-Scholes model assuming the inputs shown below:
Grant date
Number of shares under option (number)
Expected term (years)
Share price at grant (pence)
Exercise price (pence)
Risk free rate
Expected volatility
Expected dividend yield
Fair value of option (pence)
29 Operating lease commitments
The future aggregate minimum lease payments under
non-cancellable operating leases are as follows:
Within one year
Later than one year and less than five years
After five years
26 November
2010
587,283
3.0
74.0
–
0%
100.0%
5.0%
63.7
1 September 2012
3 September 2011
Land and
buildings
£m
Other
£m
Land and
buildings
£m
195.0
787.4
4,173.8
5,156.2
1.4
2.3
–
3.7
193.9
779.9
4,193.5
5,167.3
Other
£m
1.1
2.0
–
3.1
The Group leases department stores and warehouses under non-cancellable operating leases. The leases have various terms, escalation
clauses and renewal rights. The Group also leases vehicles and fixtures and equipment under non-cancellable operating leases.
116 Debenhams plc Annual Report and Accounts 2012
30 Cash generated from operations
Profit for the financial year
Taxation (note 10)
Depreciation (note 14)
Amortisation (note 13)
Loss on disposal of property, plant and equipment
Profit on disposal of available-for-sale investment
Employee options granted during the financial year (note 28)
Fair value (gains)/losses on derivative instruments
Net movements in provisions (note 26)
Finance income
Finance costs
Difference between pension credit and contributions paid (note 23)
Net movement in other long-term receivables
Net movement in other non-current liabilities
Changes in working capital
Increase in inventories
Increase in trade and other receivables
Increase/(decrease) in trade and other payables
Cash generated from operations
Overview
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Governance
Accounts
1 September
2012
£m
125.3
33.0
82.4
9.2
0.2
–
1.6
(3.1)
(1.0)
(1.2)
17.9
(21.1)
(2.6)
2.9
(11.5)
(4.7)
32.4
259.7
2
10
32
46
52
75
3 September
2011
£m
117.2
43.1
83.5
8.5
0.1
(2.0)
1.4
2.7
1.0
(3.9)
27.3
(8.8)
0.1
33.2
(25.4)
(4.6)
(5.8)
267.6
In the cash flow statement, proceeds from the disposal of property, plant and equipment and finance leases comprise:
Net book value (note 14)
Less non-cash movement in long-term finance leases
Loss on disposal of property, plant and equipment
Cash proceeds from the disposal of property, plant and equipment
Non-cash transactions
Other non-cash changes comprise:
Amortisation of issue costs relating to debt issues
Non-cash movements associated with term loan facility
Revaluation of cash and cash equivalents
Less offset to long-term loan
Non-cash movements associated with finance lease obligations
Non-cash transactions
1 September
2012
£m
0.2
–
(0.2)
–
3 September
2011
£m
55.5
(42.8)
(0.1)
12.6
1 September
2012
£m
2.9
(0.1)
0.3
–
6.2
9.3
3 September
2011
£m
5.8
(2.4)
(1.0)
(42.8)
1.2
(39.2)
Debenhams plc Annual Report and Accounts 2012 117
Notes to the Financial Statements continued
31 Analysis of changes in net debt
Analysis of net debt
Cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents
Debt due within one year
Debt due after one year
Finance lease obligations due within one year
Finance lease obligations due after one year
3 September
2011
£m
Cash flow
£m
Non-cash
movements
£m
1 September
2012
£m
29.0
(6.2)
22.8
(160.6)
(243.2)
(1.3)
(1.4)
(383.7)
15.3
(3.2)
12.1
10.0
–
2.2
–
24.3
(0.3)
–
(0.3)
(1.2)
(1.6)
(3.1)
(3.1)
(9.3)
44.0
(9.4)
34.6
(151.8)
(244.8)
(2.2)
(4.5)
(368.7)
32 Contingent liabilities
The Group is subject to litigation from time to time as a result of its activities. The Group establishes provisions in connection with
litigation where it has a present legal or constructive obligation as a result of past events and where it is more likely that not an outflow
of resources will be required to settle the obligation and the amount can be reliably estimated. Since these provisions, which are
reflected in the Group’s consolidated financial statements, represent estimates, the final resolution of any such matters could
have a material effect on the Group’s operating results and cash flows for a particular reporting period.
33 Principal subsidiary undertakings
The principal subsidiary undertakings of Debenhams plc at 1 September 2012 were as follows:
Company
Debenhams Retail plc
Debenhams Group Holdings Limited*
Debenhams Retail (Ireland) Limited
Aktieselskabet Th. Wessel & Vett Magasin du Nord
Debenhams Properties Limited
Debenhams Hong Kong Limited
Country of
incorporation
UK
UK
Ireland
Denmark
UK
Hong Kong
Country of
registration
England
England
Ireland
Denmark
England
Hong Kong
Activity
Department store retailing
Holding company
Department store retailing
Department store retailing
Property investment
Sourcing of goods
*Denotes investments held by the Company. All other investments are held by subsidiary undertakings.
The Company has taken advantage of section 410(2) of the Companies Act 2006 to list only its principal subsidiary and associated
undertakings at 1 September 2012. Unless otherwise stated, all of these are wholly owned by the Company or its subsidiary
undertakings, registered in England and Wales, and operate predominantly in the United Kingdom.
All subsidiary companies are consolidated. A full list of subsidiaries is available from the registered office.
118 Debenhams plc Annual Report and Accounts 2012
Five year record income statements
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
52 weeks
2012
£m
2,708.0
2,229.8
(1,927.5)
302.3
(81.0)
(46.3)
175.0
–
175.0
(16.7)
158.3
(33.0)
53 weeks
2011
£m
2,679.3
2,209.8
(1,913.1)
296.7
(70.2)
(42.8)
183.7
–
183.7
(23.4)
160.3
(43.1)
52 weeks
2010
£m
2,564.3
2,119.9
(1,829.5)
290.4
(55.1)
(40.2)
195.1
(5.4)
189.7
(49.8)
139.9
(42.9)
52 weeks
2009
£m
2,339.7
1,915.6
(1,650.7)
264.9
(45.3)
(37.4)
182.2
–
182.2
(61.4)
120.8
(25.7)
2
10
32
46
52
75
52 weeks
2008
£m
2,336.0
1,839.2
(1,571.6)
267.6
(50.0)
(41.5)
176.1
–
176.1
(70.2)
105.9
(28.8)
Gross transaction value
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit before exceptional items
Exceptional items
Operating profit
Net finance costs
Profit before taxation
Taxation
Profit for the financial year attributable
to equity shareholders
125.3
117.2
97.0
95.1
77.1
Gross transaction value
Revenue from concessions and consignment sales is required to be shown on a net basis, being the commission received rather than
the gross value achieved by the concessionaire on the sale. Management believes that gross transaction value, which presents revenue
on a gross basis before adjusting for concessions, consignments, staff discounts and the cost of loyalty scheme points, represents a good
guide to the overall activity of the Group.
Debenhams plc Annual Report and Accounts 2012 119
Five year record balance sheets
Assets
Non-current assets
Intangible assets
Tangible assets
Financial assets
Other receivables
Retirement benefit assets
Deferred tax assets
Total non-current assets
Net current liabilities
Non-current liabilities
Net assets
Shareholders’ equity
Share capital
Share premium account
Other reserves
Retained earnings
Total equity
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
864.9
661.6
2.7
19.3
–
83.2
1,631.7
(267.5)
(703.2)
661.0
0.1
682.9
(12.1)
(9.9)
661.0
858.1
634.6
4.0
18.3
3.9
75.7
1,594.6
(292.0)
(643.0)
659.6
0.1
682.9
(8.3)
(15.1)
659.6
846.2
676.1
8.7
17.2
–
92.0
1,640.2
(636.5)
(500.3)
503.4
0.1
682.9
(3.4)
(176.2)
503.4
839.9
669.2
9.0
–
–
80.6
1,598.7
(74.4)
(1,099.0)
425.3
0.1
682.9
288.9
(546.6)
425.3
840.8
693.3
19.2
–
25.0
57.4
1,635.7
(296.7)
(1,213.7)
125.3
0.1
682.9
16.9
(574.6)
125.3
120 Debenhams plc Annual Report and Accounts 2012
Independent auditors’ report to the
members of Debenhams plc (Company)
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
We have audited the Parent Company financial statements of Debenhams plc for the financial year ended 1 September 2012 which
comprise the Parent Company balance sheet and the related notes. The financial reporting framework that has been applied in their
preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Respective responsibilities of directors and auditors
As explained more fully in the Statement of Directors’ Responsibilities set out on page 75, the directors are responsible for the
preparation of the Parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility
is to audit and express an opinion on the Parent Company financial statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards
for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report
to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the Parent Company financial statements:
• Give a true and fair view of the state of the Company’s affairs as at 1 September 2012;
• Have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
• Have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• The part of the Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• The information given in the Directors’ Report for the financial year for which the Parent Company financial statements are prepared
is consistent with the Parent Company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if,
in our opinion:
• Adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
• The Parent Company financial statements and the part of the Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
• Certain disclosures of directors’ remuneration specified by law are not made; or
• We have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of Debenhams plc for the financial year ended 1 September 2012.
Martin Hodgson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
25 October 2012
Debenhams plc Annual Report and Accounts 2012 121
Company Balance Sheet
Company number 5448421
As at 1 September 2012
Fixed assets
Investments
Current assets
Debtors
Derivative financial instruments
Creditors: amounts falling due within one year
Derivative financial instruments
Net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Derivative financial instruments
Net assets
Capital and reserves
Called-up share capital
Share premium account
Hedging reserve
Profit and loss account
Total shareholders’ funds
1 September
2012
£m
3 September
2011
£m
Note
4
6
5
7
5
8
5
11
12
12
12
13
2,745.9
2,745.9
135.5
–
135.5
(1,175.3)
–
(1,039.8)
1,706.1
(244.8)
(8.3)
1,453.0
0.1
682.9
(6.4)
776.4
1,453.0
115.1
0.1
115.2
(1,212.7)
(0.3)
(1,097.8)
1,648.1
(243.2)
(3.8)
1,401.1
0.1
682.9
(2.9)
721.0
1,401.1
The financial statements on pages 122 to 128 were approved by the board on 25 October 2012 and were signed on its behalf by:
Simon Herrick
Chief Financial Officer
122 Debenhams plc Annual Report and Accounts 2012
Notes to the Company
Financial Statements
For the financial year ended 1 September 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
1 Accounting policies
Basis of preparation
These financial statements have been prepared on the going concern basis and in accordance with UK GAAP using the historical cost
convention as modified by financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
These financial statements have been prepared in accordance with applicable accounting standards within the United Kingdom and the
Companies Act 2006.
The Company is also exempt under the terms of FRS 8 “Related Party Disclosures” from disclosing related party transactions with
entities that are wholly owned subsidiaries.
The principal accounting policies, which have been applied consistently during the financial year, are set out below.
Investments
Investments are held at cost less any provision for impairment.
Impairment testing
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject
to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s net realisable value and value-in-use.
Borrowings
All borrowings are stated at the fair value of the consideration received after deduction of issue costs. Issue costs, together with finance
costs, are charged to the profit and loss account over the term of the borrowings. Finance costs represent a constant proportion of the
balance of capital repayments outstanding.
Taxation
Current tax is provided at amounts expected to be paid (or recovered) using the tax rates that are in force during the period.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where
transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the
balance sheet date. Timing differences are differences between the taxable profits and the results as stated in the financial statements
that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the
financial statements.
Deferred tax is measured on a non-discounted basis. A deferred tax asset is regarded as recoverable and therefore recognised only when,
on the basis of all available evidence, it can be regarded as more likely than not that there will be taxable profits from which the future
reversal of the underlying timing differences can be deducted.
Deferred tax is measured at the average tax rates which are expected to apply in the periods in which the timing differences are expected
to reverse, based upon tax rates and laws which have been enacted or substantively enacted by the balance sheet date.
Dividend distribution
A final dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s financial statements
in the period in which the dividend is approved by the Company’s shareholders. Interim dividends are recognised when paid.
Share-based payments
Where the Company has granted options over the Company’s shares to employees of its subsidiaries, a capital contribution has been
deemed made by the Company. This is then recharged to the subsidiary and is based on the fair value of the options issued spread over
the options vesting period. At each balance sheet date, the Company revises its estimate of the number of options that are expected to
vest. It recognises the impact of the revision to original estimates, if any, with a corresponding adjustment to equity.
Debenhams plc Annual Report and Accounts 2012 123
Notes to the Company Financial Statements continued
1 Accounting policies continued
Derivatives
The derivative instruments used by the Company to manage its interest rate risk are interest rate swaps.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at
fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as an effective hedging
instrument and the nature of the item being hedged. The Company designates certain derivatives as hedges of highly probable forecast
transactions (cash flow hedges).
The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items as
well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also documents its
assessment, both at the inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged items.
i) Cash flow hedges
The effective portion of the changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognised in
equity. The gain or loss relating to the ineffective portion is recognised immediately in the relevant line of the profit and loss account
which will be affected by the underlying hedged item.
Amounts accumulated in equity are reclassified and adjusted against the initial measurement of the underlying hedged item when
the underlying hedged item is recognised on the balance sheet or in the profit and loss account.
When a hedged instrument expires, is sold or when a hedge no longer meets the criteria for hedge accounting, hedge accounting
is discontinued. Any cumulative gain or loss existing in equity at that time is held in equity until the forecast transaction occurs.
When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately
reclassified to the relevant line of the profit and loss account which would have been affected by the forecasted transaction.
ii) Derivatives that do not qualify for hedge accounting
Certain derivatives do not qualify for hedge accounting. Changes in fair value of any derivative instruments that do not qualify for hedge
accounting are recognised immediately in the profit and loss account.
Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares are shown as a deduction, net of tax, from the proceeds.
Where the Company purchases its own ordinary shares the consideration paid, including any directly attributable incremental costs
(net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued.
Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental
transaction costs together with the related income tax effects, is included in equity attributable to the Company’s equity holders.
2 Profit and loss account
The directors have taken advantage of the exemption available under section 408 of the Companies Act 2006 and have not presented
a profit and loss account for the Company however the Company’s profit and loss account has been produced for approval by the board.
A profit of £112.4 million is attributable to shareholders for the financial year ended 1 September 2012 (2011: £120.2 million).
The contracts of employment for all the executive directors are held by Debenhams plc. The total cost of employing the directors
is disclosed in the remuneration report.
Auditors’ remuneration of £0.1 million (2011: £0.1 million) is borne by another Group undertaking.
3 Dividends
Final paid 2.0 pence (2011: nil pence) per £0.0001 share
– Settled in cash
Interim paid 1.0 pence (2011: 1.0 pence) per £0.0001 share
– Settled in cash
1 September
2012
£m
3 September
2011
£m
25.6
12.9
38.5
–
12.9
12.9
A final dividend of 2.0 pence per share (2011: nil pence per share) was paid during the year in respect of the financial year ended
3 September 2011, together with an interim dividend of 1.0 pence per share (2011: 1.0 pence per share) in respect of the financial year
ended 1 September 2012. The directors are proposing a final dividend in respect of the financial year ended 1 September 2012 of
2.3 pence per share (2011: 2.0 pence per share), which will absorb an estimated £29.0 million (2011: £25.6 million) of shareholders’
funds. It will be paid on 11 January 2013 to shareholders who are on the register of members at close of business on 7 December 2012.
No liability is recorded in the financial statements in respect of the final dividend as it was not approved at the balance sheet date.
124 Debenhams plc Annual Report and Accounts 2012
4 Investments
Cost
At 3 September 2011 and at 1 September 2012
Provision for impairment
At 3 September 2011 and at 1 September 2012
Net book value
At 3 September 2011 and at 1 September 2012
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Investments in
subsidiary
undertakings
£m
4,068.8
1,322.9
2,745.9
The directors consider that the carrying value of the investments is supported by their underlying net assets.
Investment in subsidiary undertakings
In accordance with FRS 11 “Impairment of fixed assets and goodwill” the carrying values of the Company’s subsidiary undertakings
have been compared to their recoverable amounts represented by the value-in-use to the Company. The review has resulted in an
impairment of nil (2011: nil). The discount rate used in the calculation to arrive at the valuation was 8.2% (2011: 8.9%) on a pre-tax basis.
The principal subsidiary undertakings of the Company at 1 September 2012 are shown in note 33 of the Debenhams Group financial
statements.
5 Derivative financial instruments
Current assets
Interest rate swaps – cash flow hedges
Current liabilities
Interest rate swaps – cash flow hedges
Non-current liabilities
Interest rate swaps – cash flow hedges
1 September
2012
£m
3 September
2011
£m
–
–
(8.3)
(8.3)
0.1
(0.3)
(3.8)
(4.0)
Information relating to the derivatives held by the Company are shown in note 21 of the Debenhams Group financial statements.
6 Debtors
Deferred tax asset (note 10)
Amounts owed by Group undertakings
1 September
2012
£m
1.9
133.6
135.5
3 September
2011
£m
1.1
114.0
115.1
Amounts owed by Group undertakings are unsecured, repayable on demand and carry an average rate of interest of 3.0% (2011: 2.8%).
Debenhams plc Annual Report and Accounts 2012 125
Notes to the Company Financial Statements continued
7 Creditors: amounts falling due within one year
Bank borrowings (note 9)
Amounts owed to Group undertakings
Accruals
1 September
2012
£m
151.8
1,022.9
0.6
1,175.3
3 September
2011
£m
160.6
1,051.5
0.6
1,212.7
Amounts owed to Group undertakings are unsecured, have no fixed date of redemption and either carry an average interest rate of 3.0%
(2011: 2.8%) or are interest free.
8 Creditors: amounts falling due after more than one year
Bank borrowings (note 9)
9 Borrowings
Creditors: amounts falling due within one year
Revolving credit facility
Term loan facility
Less: issue costs
Creditors: amounts falling due in more than one year
Term loan facility
Less: issue costs
Maturity of debt
Amounts falling due:
In one year or less or on demand
In more than one year but not more than two years
In more than two years but not more than five years
1 September
2012
£m
244.8
3 September
2011
£m
243.2
1 September
2012
£m
3 September
2011
£m
155.0
–
(3.2)
151.8
250.0
(5.2)
244.8
165.0
0.1
(4.5)
160.6
250.0
(6.8)
243.2
1 September
2012
£m
3 September
2011
£m
155.0
–
250.0
405.0
165.1
–
250.0
415.1
Information relating to the borrowings of the Company is shown in note 20 of the Debenhams Group financial statements.
The Group has a £650.0 million credit facility comprising a term loan of £250.0 million and a Revolving Credit Facility (“RCF”) of
£400.0 million. These facilities expire in October 2015, with an option to extend further to October 2016. At 1 September 2012 the
Group’s facilities outstanding comprised the term loan of £250 million (2011: £250.0 million) and RCF drawings of £155.0 million (2011:
£165.0 million). During the current and prior financial years the Company has complied with its covenants relating to its credit facilities.
Issue costs, which mainly relate to facility costs, are being amortised over the term of the facilities to October 2015 at the effective
interest rate based on the committed amount of the term loan. The total amortisation charge relating to the issue costs of the Group’s
credit facilities cancelled and current for the financial year ended 1 September 2012 was £2.9 million (2011: £5.8 million).
126 Debenhams plc Annual Report and Accounts 2012
10 Deferred taxation
At 3 September 2011 – asset
Credited to reserves
At 1 September 2012 – asset
Overview
Strategy review
Finance and risk review
Sustainability
Governance
Accounts
2
10
32
46
52
75
Fair value
gains
£m
1.1
0.8
1.9
Deferred tax is calculated in full on all temporary differences under the liability method using a tax rate of 23.0% (2011: 25.0%).
The Finance Act 2012, which became substantially enacted on 3 July 2012, included legislation reducing the main rate of corporation
tax from 26% to 24% from 1 April 2012 and also reducing the main rate of corporation tax from 24% to 23% from 1 April 2013. A further
reduction to the main rate is proposed to reduce the rate to 22% by 1 April 2014. This further change has not been substantially enacted
at the balance sheet date and is therefore not included in these financial statements.
The effect of the reduction in the corporation tax rate enacted in the 2012 Act has been to reduce the net deferred tax asset recognised
at 3 September 2011 by approximately £0.1 million.
The proposed reduction of the main rate of corporation tax to 22% from 1 April 2014 is expected to be enacted separately next year.
The overall effect of the further change from 23% to 22%, if applied to the deferred tax balances at 1 September 2012, would be to reduce
the net deferred tax asset be approximately £0.1 million.
Deferred tax provided on the fair value gains represents the deferred tax on the derivatives that qualify for cash flow hedges.
11 Called-up share capital
Issued and fully paid – Ordinary shares of £0.0001 each
At start and end of year
1 September 2012
3 September 2011
£
Number
£
Number
128,680 1,286,806,299
128,680
1,286,806,299
The Company acquired 23,559,155 of its own shares through purchases on the London Stock Exchange during the financial year.
The total amount paid to acquire the shares net of income tax was £20.1 million. The shares are held as treasury shares. The Company
has the right to reissue these shares at a later date. All shares acquired by the Company were fully paid.
The number of ordinary shares in the Company held by the Debenhams Retail Employee Trust 2004 (“DRET”) in connection with the
Group’s employee ownership plan described is as follows:
Debenhams Retail Employee Trust 2004
1 September
2012
Ordinary
shares
Number
723,536
3 September
2011
Ordinary
shares
Number
723,536
The market value of the shares at 1 September 2012 was £0.7 million for the DRET (2011: £0.4 million). The cost of the shares held at the
year end was £0.6 million (2011: £0.6 million).
Share option schemes
At 1 September 2012 the Group had four schemes in operation: the Performance Share Plan (“PSP”), the Executive Share Option Plan
(“ESOP”), the Share Incentive Plan (“SIP”) and the Deferred Bonus Matching Plan (“DBMP”). The following table reconciles the movement
in share options and the weighted average exercise price (“WAEP”) for the ESOP scheme. Grants under the PSP, SIP and DBMP share
options all comprise a right to acquire shares for no or nominal consideration.
For further information on these schemes please see note 28 of the Debenhams Group financial statements.
Outstanding at 28 August 2010
Granted
Exercised
Lapsed
Forfeited
Outstanding at 3 September 2011
Granted
Forfeited
Outstanding at 1 September 2012
DBMP
Number
–
849,130
–
–
(12,927)
836,203
–
(248,920)
587,283
SIP
Number
715,000
650,000
(690,000)
–
(25,000)
650,000
200,000
(400,000)
450,000
PSP
Number
5,382,579
191,250
–
(3,410,092)
–
2,163,737
5,947,558
(634,410)
7,476,885
ESOP
Number
2,414,374
–
–
(1,451,682)
–
962,692
–
(131,069)
831,623
WAEP
Pence
95.1
–
–
103.0
–
85.5
–
85.5
85.5
Debenhams plc Annual Report and Accounts 2012 127
Notes to the Company Financial Statements continued
12 Reserves
At 3 September 2011
Profit for the financial year
Cash flow hedges – net fair value losses (net of tax)
Employee share ownership plans (net of tax)
Purchase of treasury shares
Dividends to shareholders (note 3)
At 1 September 2012
Share premium
account
£m
682.9
–
–
–
–
–
682.9
Hedging
reserve
£m
(2.9)
–
(3.5)
–
–
–
(6.4)
Profit and loss
account
£m
721.0
112.4
–
1.6
(20.1)
(38.5)
776.4
Hedging Reserve
The hedging reserve represents the change in fair value of the interest rate swaps which have been designated as cash flow hedges.
Profit and Loss Account
A dividend of £38.5 million (2011: £12.9 million) was paid by the Company during the financial year ended 1 September 2012.
13 Reconciliation of movements in shareholders’ funds
Profit for the financial year
Dividends paid (note 3)
Retained profit
Cash flow hedges:
– Net fair value (losses)/gains (net of tax)
Purchase of treasury shares
Employee share ownership plans (net of tax)
Net increase to shareholders’ funds
Opening shareholders’ funds
Closing shareholders’ funds
1 September
2012
£m
112.4
(38.5)
73.9
3 September
2011
£m
120.2
(12.9)
107.3
(3.5)
(20.1)
1.6
51.9
1,401.1
1,453.0
1.0
–
1.4
109.7
1,291.4
1,401.1
14 Contingent liabilities
The Company is also liable for the pension schemes’ contributions and deficits, where relevant, for both the Debenhams Executive
Pension Plan and the Debenhams Retirement Scheme. The liability in the schemes at 1 September 2012 was £57.3 million (2011: asset
of £3.9 million).
There are a number of contingent liabilities that arise in the normal course of business which, if realised are not expected to result in
a material liability to the Company. The Company recognises provisions for liabilities when it is more likely than not that a settlement
will be required and the value of such a payment can be reliably estimated.
128 Debenhams plc Annual Report and Accounts 2012
Store list
UK
Aberdeen
Altrincham
Ashford
Ayr
Ballymena
Banbury
Bangor
Barrow
Basildon
Basingstoke
Bath
Bedford
Belfast
Birmingham
Birmingham Fort
Blackburn
Blackpool
Bolton
Bournemouth
Brighton
Bristol
Bromley
Bury (Gtr Manchester)
Bury St Edmunds
Cambridge
Canterbury
Cardiff
Carlisle
Carmarthen
Chatham
Chelmsford
Cheltenham
Chester
Chesterfield*
Clapham
Colchester
Coventry
Crawley
Croydon
Derby
Doncaster
Dumfries
Dundee
Dunfermline
East Kilbride
Eastbourne
Edinburgh
Eltham
Exeter
Falkirk
Fareham
Farnborough
Folkestone
Foyleside
Gateshead –
Metro Centre
Glasgow
Glasgow Silverburn
Gloucester
Gravesend
Great Yarmouth
Guildford
Hanley
Harrogate
Harrow
Hastings
Hemel Hempstead
Hounslow
Hull
Ilford
Inverness
Ipswich
Kidderminster
King’s Lynn
Kirkcaldy
Lakeside
Leeds – City Centre
Leeds – White Rose
Leicester
Leith
Lincoln
Liverpool
Livingston
Llandudno
Llanelli
London – Oxford Street
London – Westfield
Luton
Manchester
Manchester –
Trafford Park
Mansfield
Merryhill
Merthyr Tydfil
Middlesbrough
Milton Keynes
Monks Cross
Newbridge
Newbury - Outlet
Newbury - Parkway
Newcastle-upon-Tyne
Newry
Northampton
Norwich
Nottingham
Nuneaton
Oldham
Orpington
Oxford
Perth
Plymouth
Portsmouth
Preston
Reading
Redditch
Romford
Rushmere
Salisbury
Scarborough
Sheffield
Sheffield – Meadowhall
Slough
Southampton
Southend
Southport
Southsea
South Shields
Staines
Stirling
Stockport
Stockton
Stratford-upon-Avon
Sunderland
Sutton
Swansea
Swindon
Taunton
Telford
Torquay
Truro
Uxbridge
Wakefield
Walsall
Walton
Warrington
Welwyn Garden City
Westwood Cross
Weymouth
Wigan
Wimbledon
Winchester
Witney
Woking
Worcester
Workington
Worthing
Wrexham
York
International
Magasin du Nord
Århus
Field’s – Copenhagen
Kgs Nytorv –
Copenhagen
Lyngby
Odense
Rødovre
Republic of Ireland
Cork – Mahon Point
Cork – Patrick Street
Dublin – Blackrock
Dublin – Blanchardstown
Dublin – Henry Street
Dublin – Tallaght
Galway
Limerick
Newbridge
Tralee
Waterford
Iran
Mashad
Shiraz
Tehran
Tehran Jame Jam
Jordan
Amman
Kazakhstan
Astana
Kuwait
Airport
Avenues
Souq Sharq
Malaysia
Kuala Lumpur
Kuala Lumpur –
The Curve
Malta
Tigne Point
Franchise stores
Armenia
SAS Home Store
SAS Home Store (Komitas)
Yerevan
Philippines
Davao Abreeza Mall
Manila Glorieta
Manila Shangri La
Manila Trinoma
Azerbaijan
Baku
Bahrain
Manama
Cyprus
Avenue
Apollon
Central
Engomi
Kinyras
Korivos
Ledra
Nicosia
Olympia
Zenon
Czech Republic
Prague
Egypt
Alexandria
Georgia
Tblisi*
Hungary
Budapest
Iceland
Reykjavik
India
Bangalore
Delhi
Mumbai
Indonesia
Jakarta Senayan City
Karawaci
Kemang Village*
Qatar
Doha
Romania
Banessa
Bucharest
Constanta
Oradea
Plaza
Sun Plaza
Russia
Moscow
Pakistan
Karachi
Saudi Arabia
Gallery
Jeddah
Jeddah Airport
Khobar
Madinah Al Noor
Mecca
Riyadh Granada Mall
Riyadh Kingdom Mall
Riyadh Sahara Mall
Turkey
Istanbul
UAE
Abu Dhabi
Abu Dhabi Dalma*
Dubai Deira
Dubai Ibn Battuta
Dubai Mall
Dubai Mall of Emirates
Dubai Mirdiff
Sharjah
Vietnam
Ho Chi Minh City
*Opened after 1 September 2012
Debenhams plc Annual Report and Accounts 2012 129
Glossary
Concessions
Brands which are sold through our stores where the stock belongs to a third party concessionaire. They are found chiefly in womenswear
(e.g. Wallis, Oasis, Warehouse) and accessories (e.g. Tripp luggage).
Core brands
Brands designed and produced exclusively for Debenhams. They include brands such as Collection, Mantaray, Maine New England and
Red Herring. They are found in all product categories.
Designers at Debenhams
Exclusive diffusion ranges designed for Debenhams by leading international designers including Julien Macdonald, Jasper Conran
and John Rocha.
Earnings per share (“EPS”)
The profit for the year attributable to shareholders, divided by the weighted average number of shares in issue.
EBITDA
Earnings before interest, taxation, depreciation and amortisation.
Flagship store
A large store, typically over 100,000 sq ft, in a major city. They include Oxford Street and Westfield in London, Henry Street in Dublin,
Birmingham, Liverpool and Newcastle-upon-Tyne.
Footfall
The number of people who visit our stores.
Free cash flow
Cash generated from operations before exceptional items less net cash used in investing activities.
Gross margin
Gross transaction value less the cost of goods sold, as a percentage of gross transaction value.
Gross transaction value
Revenue (excluding VAT) on a gross basis before adjusting for concessions, consignments and staff discounts.
International brands
Brands such as Levis, Ben Sherman, Clarins and Estée Lauder for which Debenhams owns the stock.
Market share
The percentage of the market or market segment that is being serviced by Debenhams. For instance, if 100 T-shirts were sold a year in the UK
and Debenhams sold ten of them, it would have 10 % market share.
Multi-channel
Multi-channel sales comprise those from online, mobile, instore ordering and click and collect. We use online sales as a measure of the growth
of the multi-channel business as it is the largest of these sales channels.
Own bought brands
Brands for which Debenhams owns the stock. They include core brands, Designers at Debenhams and international brands.
Uninvested core store
A store which is neither new nor modernised. All remaining uninvested core stores will be modernised by Christmas 2014.
130 Debenhams plc Annual Report and Accounts 2012
Shareholder information
Registered office and head office
1 Welbeck Street
London W1G 0AA
Registered in England and Wales
Company number: 5448421
Financial advisors
Lazard
50 Stratton Street
London W1J 8LL
Stockbrokers
Citigroup Global Markets Limited
Citigroup Centre
Canada Square
London E14 5LB
Oriel Securities Limited
150 Cheapside
London EC2V 6ET
Solicitors
Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HS
Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
1 Embankment Place
London WC2N 6RH
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone: 0871 384 2766*
www.shareview.co.uk
* Calls to this number cost 8p per minute from a BT landline; other providers’ costs may vary.
Lines are open 8.30am to 5.30pm, Monday to Friday.
Debenhams plc Annual Report and Accounts 2012 131
www.debenhams.com
Designed and produced by luminous.co.uk
Printed in-house by Debenhams
132 Debenhams plc Annual Report and Accounts 2012
1 Welbeck Street, London, W1G 0AA
www.debenhams.com