How we avoided the Debenhams disaster

debenhams plc

The British retail store Debenhams plc was founded in the 18th century when it began with one singular store in London. By 2018 it had 178 stores across the country. Today these stores are closing down, with stock being sold off at massively reduced prices.

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LSE:DEB Debenhams plc share price fell from £1.00 a share in 2013 to just £0.03p only a few months ago before it fell into administration. A disaster for Sports Direct owner Mike Ashley who lost his entire 30% holding in the company. However, I don’t feel too bad for him in all honesty. As the warning signs were there all along, and he was buying up more and more shares even on their way down to extinction.

So what happened? And how did we navigate ourselves away from getting involved in this debacle?

I originally analysed Debenhams financials back in April 2019, before the news of their closing stores. Back then their share price had fallen to extremely cheap levels, and I wanted to know whether they were a bargain, or if they deserved to be at that level. Analysts from all over the internet were posting articles referring to this potential opportunity for investors.

Later that year in November the disappointing news came that they were going into administration. But it was no surprise to me by that point as I had already ‘passed’ on the decision to invest based on the numbers I’d seen.

Revenue had been stagnant for nearly 10 years. Since 2010 the company yearly revenue had remained at around £2.2bn and had not seen any growth. Despite this, the cost of sales had been rising. In 2010 the cost of sales sat at £1.8bn. By 2018, this had reached £2.2bn. Leaving the company with no gross margin whatsoever. Yet this decline was incremental. Every year looking worse than the last. By 2013 anyone checking these numbers would have noticed the worrying decline.

On top of this the company expenses were rising out of control. In 2010 the company expenses sat at £98m. By 2014 this had risen to £150m. By 2018, it had reached £496m.

Again, every year the expenses rose significantly. Further reducing any profit.

Net earnings that had previously sat at 4-5% a year, started to see years of 3% and then 2% until 2018 when the company posted a -£460m losing year. Yet the warnings signs had been there long before this arrived.

Despite this worrying trend between 2010 – 2018 it might surprise you to hear that Mike Ashley continued to grow his holding in the company all the way down. Each year his Sports Direct company bought more and more shares until he had reached a 30% ownership holding of the Debenhams company. And whilst the dramatically reducing share price may have been the golden egg here, this was happening despite poorer and poorer yearly financials stemming back to 2010 onwards.

Realistically speaking we would have known by 2013. Three years of decline begins to show an obvious trend in declining numbers which would have kept me and all CLEAN investors away. Their negative patterns and poor margins would have given the company a very poor CLEAN score of -35, highlighting the need to avoid the cheap shares like the plague.

So whilst I cannot be certain of the exact reason behind the company failure, it is clear that this was not a sudden collapse. The numbers gave us the warning we needed, if only Mike Ashley and Sports Direct had looked. 

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

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