∞JYOTSNA KANJHAN ∞PERSCIS BENJAMIN ∞NEHA VYAS ∞LEKSHMI SANKAR ∞IMAAD ALI KHAN ∞HONEY GANGLANI ∞HITEN UMRANIA

∞BRINDA PATEL ∞BHUMI SAGAR

081424597 081411195 081469990 081413557 081419032 081440405 081438413 081411380 081419087

Introduction to Accounting 2 - CASH FLOW Analysis

1

Aim and Coverage
AIM of the presentation is to : Analyze the annual report of Debenhams PLC with special reference to its cash flow statement. Conclude on its financial strengths and the ability to sustain in uncertain market conditions. COVERAGE : Finance Director’s review and his critical evaluation on the operating and financial conditions. Analysis of the Income Statement and Balance Sheet. Critical analysis of the Cash Flow Statement.
2

Debenhams Plc is one of the United Kingdom's longest continuously operating clothing and goods retailers.

The company owns and operates nearly 100 department stores, primarily in England.

3

The year in Brief
Strong performance from the Designers at Debenhams and changes to the Women’s wear ranges which has led to increase in sales. Seven new department stores have been launched; Ten new international franchise stores opened. A flagship store at Westfield London, opened on 30th October 2008. With such developments, there have been market share gains in all major clothing categories.

4

The year in brief…Financial Outlook

From the Financial point of view, the Net Cash generated from operating activities has been £191.4m, a reduction of 16% as compared to last year. Improvement was recorded on the Net Debt of £22.5m over the prior year. No change in the Gross Profit Ratio is seen, but the Net Profit Ratio has decreased by 1% because of increase in administration expenses. An additional 0.5p per share was paid as dividend together with the interim dividend of 2.5p.

5

Cash Flow Analysis
Analysis of Cash Flows from Operating Activities: Taxation Depreciation Interest Income Interest Expense Working Capital Trade Receivables Trade Payables Analysis of Cash Flows from Investing Activities: Purchase and Sale of Property, Plant, Equipment and other intangible assets. Analysis of Cash Flows from Financing Activities: Long Term Credit Facilities Payment of Dividends

6

Analysis of Cash Flows from Operating Activities
Taxation Findings - Profits before taxes were low [£6.3m lower than last year] Taxation has reduced from £79m to £77.1m, there is a change of £1.9m Analysis - This is because there was a change in the tax rate in the UK corporation tax system from 29.2% - 28%. Conclusion If the tax rate had not reduced, the company would’ve ended up paying more tax as compared to what they’ve paid this year, resulting in more outflows of cash.
7

Analysis of Cash Flows from Operating Activities
Depreciation Findings – depreciation has reduced by 15.8%. Freehold property and long leasehold has not increased, and therefore our depreciation was calculated as last year. But for short leasehold, there was an addition of £16m, but a disposal of only £7.8m. Depreciation has reduced due to disposal of fixed assets, mainly freehold property. Conclusion This doesn’t show a rundown in the business, because there is also an increase in other non-current assets. With the disposal of fixed assets, they have also raised more cash, since there has been a profit on the disposal of fixed assets
8

Analysis of Cash Flows from Operating Activities
Interest Income Cash from interest received – £4.2 to £4.8, due to increase in the interest rate on bank deposits Interest Expense Our interest expense has increased by £4.2m as our bank loan and overdraft have increased from £104.8m to £144.5m Bank overdraft has increased this year because Debenhams has availed more revolving credit facilities. Conclusion – Debenhams has changed its gearing strategy, as we have analyzed its past 2 years reports, we found that in the year 2006, it depended more on long term liabilities and less on equity. In the year 2007, it shifted its focus from long-term liability to more equity, and in 2008[that is the current year of analysis], we’ve seen that it’s again shifted its focus from equity and is focusing more on borrowings such as bank credit facilities.

9

Analysis of Cash Flows from Operating Activities
WORKING CAPTIAL There was a decrease in inventory, trade and other receivables, and trade and other payables Inventory has reduced since there was a reduction in purchase of inventory in 2008 because of left over inventory from last year Also, sales have increased this year due to increased demand and market share, plus opening of new stores.

CASH GENERATED FROM OPERATING ACTIVITIES HAS REDUCED IN COMPARISON TO THE PREVIOUS YEAR AND HENCE THERE IS LESS INFLOW OF CASH.
10

Analysis of Cash Flows from Investing Activities
PURCHASE OF PLANT AND EQUIPMENT Investment in Property, Plant and Equipment for the year has increased by £40m. This shows that Debenhams has invested a great deal in equipment to achieve higher operational efficiency and this will help increase future cash flows. Disposal and write-off of assets is £49.2m which is £2.5m times lesser than the purchase. Conclusion: This means that they are efficient in balancing their non-current assets. There was a 30% increase in investment this year.
11

Analysis of Cash Flows from Financing Activities
Repayment of Term Loan Facility Debenhams enjoys a term loan and a revolving credit facility (£1,050.00m). This term loan facility(effective from the year 2006) is repayable in installments, the loan will be repaid fully by 2011. So far, the loan has been repaid up to only £200m, £100m being paid in the year 2007 and £100m being paid in 2008. Conclusion: Debenhams still has an unpaid term loan of £805m, which is supposed to be paid in the next 3years, the chances of which are highly unlikely.

12

Ratio Analysis for Debenhams PLC.
RATIO ANALYSIS FOR DEBENHAMS PLC.
2008 Profit & Loss Account Sales Gross Profit Operating Profit 1,839.20 267.60 176.10 1,774.40 266.00 179.80 64.80 1.60 (3.70) 2007 Variance

Current Asset Current Liability Quick Asset Quick Liability Euity / Shareholder funds B/s Total Asset B/s Net Asset

348.60 (645.30) 348.60 (645.30) 125.30 348.60 125.30

393.60 (609.40) 393.60 (609.40) 163.00 393.60 163.00

(45.00) (35.90) (45.00) (35.90) (37.70) (45.00) (37.70)

Gross Profit Ratio

14.55%

14.99%

0%

Net Profit Ratio

9.57%

10.13%

-1%

Current Ratio

(0.54)

(0.65)

0

Quick Ratio

(0.54)

(0.65)

0

13

14

15

16

17

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Conclusion on Cash Flow of Debenhams
Chart Title
4 3 2 1 -200 -100 0 100 200 300

1. Net Cash & 2. In Financing 3. In Investing Cash Activities Activities Equivalents 2007 79.3 -51.9 -96.5 2008 -2.9 -148 -125.6

4. From Operating Activities 227.4 191.4
19

Final Conclusion
Even though the Chairman’s Report states that “Gross margin was maintained at the same level as last year”, which is shown to be favorable is actually not. The Net Profit Margin has taken a negative form. Even though the Net Debt position has improved by £22.5m, they still have an outstanding term loan repayment of £805m which is supposed to be repaid by the next 3years which is very unlikely looking at the current market and macroeconomic conditions. Market Share is shown to have increased by 0.3%(almost negligible) but for a well established retailer like Debenhams, it has not stood to its own potential. Potential share holders should not be lured in to the attractive trap of high dividends and plans of deleveraging the balance sheet as the company has a high net debt, decreasing profit margins and negative net cash and cash equivalents. 20

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