U.S. Markets closed

Edited Transcript of DEB.L earnings conference call or presentation 20-Apr-17 8:00am GMT

Thomson Reuters StreetEvents

Half Year 2017 Debenhams PLC Earnings Presentation

London Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Debenhams PLC earnings conference call or presentation Thursday, April 20, 2017 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ian Cheshire

Debenhams plc - Non-Executive Chairman

* Matthew George Smith

Debenhams plc - CFO and Director

* Sergio Bucher

Debenhams plc - CEO and Director

* Suzanne Marie Harlow

Debenhams plc - Group Trading Director and Executive Director

================================================================================

Conference Call Participants

================================================================================

* Adam G. Cochrane

UBS Investment Bank, Research Division - Executive Director and Analyst

* Caroline Gulliver

Jefferies LLC, Research Division - Equity Analyst

* Kate Calvert

Investec Bank plc, Research Division - Retail Analyst

* Richard B. Chamberlain

RBC Capital Markets, LLC, Research Division - Analyst

* Tom Trevor Walter Gadsby

Liberum Capital Limited, Research Division - Analyst

* Tony Shiret

Haitong Bank S.A., Research Division - Retail Analyst

* Warwick Okines

Deutsche Bank AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [1]

--------------------------------------------------------------------------------

Okay. Good morning. Welcome to the Debenhams' Half Year Results and Strategy Presentation this morning. Good morning, Ian. So welcome Ian. Ian just joined us actually as well. I thought you're going to say I'm quite delayed this morning. So we'd go straight through to the financial headlines. So let us go through with those. You want to give an introduction first, Ian? Okay, you do that.

--------------------------------------------------------------------------------

Ian Cheshire, Debenhams plc - Non-Executive Chairman [2]

--------------------------------------------------------------------------------

Thanks, Matt. An example of just-in-time [inaudible] Social Shopping. So welcome. Is that obviously me? So I fought hard for the right to have the best slides is more important [inaudible] we achieve. I just want to say -- again, on to the first slide, please. I just want to say a few words really, but this is Sergio's show today and the team. And I'm really pleased that we've got them on board, and I think we're off to a really impressive start with the thinking behind the strategy. Based on what Matt has mentioned, this is the first set of results. The team particularly would like to thank Suzanne and Matt for steering the ship, as we had the arrival of Sergio. And that was an important part behind the results you're seeing. But also Sergio has really had an immediate impact on the business. But I think actually these are good sets of results given where we were. I think I'd just like to pick up 2 or 3 points here, which are important, not just with certain analysts, but I would like to point out the pension is in surplus. I'd also like to point out that dividend is maintained, and that was a conscious decision by the Board that was debated. And we recognize that we are all facing into particularly uncertain background. I think this was written before we had the general elections here with and a few other sort of bonus prizes. But I think what's key is that we have a resilient business base, on which we think we can build. I think what's really exciting about today is we're announcing the way forward. In any sort of relaunch of the business, and this is still a business that has got a great future, that you need 3 things: I think you need leadership; you need a strategy; and then you need execution. I think we've absolutely got the leadership now in place, and I'm really pleased that Sergio is here. I think we have really worked on the strategy, and obviously, some of you would like to have every part of the spreadsheet filled in today, and I say that's not going to happen for everyone. But we have a clear theme, and we know where we're going. And obviously the hard yard is ahead of us in terms of execution. But I'm extremely confident that we've got the right strategy with Debenhams Redesigned. I'm really looking forward to getting a reaction to it and seeing it actually land. Because ultimately, that's the most important thing. So with that, I'm sorry to steal Matt's thunder. I'll get back to Matt and let him talk you through the important numbers for the first half before Sergio does the -- from the strategy side. Thank you very much.

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [3]

--------------------------------------------------------------------------------

Thanks, Ian. Okay, good morning, again. So without further ado, let's jump straight through to the financial headlines, shall we? Here we go. So for the first half. The group gross transaction value grew by 2.9% with like-for-like sales in constant currency up 0.1%. On a reported level, like-for-like sales were up 3%. Gross margin rates was 30 basis points down on last year, and the profit before tax was in line with expectations, GBP 87.8 million, which leads to an earnings per share of 5.8p. Net debt was also in line with expectations and ended the half at GBP 216 million. The Debenhams defined benefit pension schemes, which have been closed to future accrual since 2006, have a net surplus of GBP 46 million as shown in the accounts for the half year. This compares with the GBP 4 million deficit at year-end, and the improvement in valuation has been driven by the increase in the pension fund asset values. We've more detail in the appendix on this. And to replay what Ian said, the Board has decided to maintain the interim dividend of 1.025p. Before going to the detail of the results, let's cover some of the operational headlines we've delivered in the first half that were on the screen here. So in line with our aim to grow our non-clothing mix, we delivered strong progress in Beauty and Gifting category, especially over peak trading. Our non-clothing mix grew by further 1% to represent 66% of GTV. Full price sales mix grew 2%, and as planned, stock levels continued to reduce, down 4% on a like-for-like basis. This helps to improve markdowns for the sixth season in a row. We delivered strong momentum in online sales with growth strengthening over peak trading, leading to overall growth of 15% for the half. And as planned, we completed 75% of our space reduction optimization program in time for peak trading with introduction of over 300 new offers. The existing program will be completed by autumn/winter this year. So overall, we're pleased with our operational progress. It sets us up well for the new strategy Sergio will outline shortly. So back to the results. Well, overall, we delivered a fair set of performance over the first half with profit in line with expectation. But especially results into the U.K. and International segments, you can see that U.K. delivered GBP 118 million of EBITDA, which is down 6% from last year. International segment delivered GBP 31.1 million of EBITDA, which is up 13% from last year. This reflects the benefit of foreign exchange translation in Magasin du Nord and the examinership process completed last year in Republic of Ireland, offsetting a weaker performance from our franchise stores in the Middle East. The underlying profit before tax of GBP 87.8 million is down 6% from last year. The profit after tax was GBP 71.6 million, leading to an earnings per share of 5.8p, which compares to 6.2p last year.

So this slide shows the contribution to sales growth and highlights the strong growth in online and the impact from currency. U.K. performance was 0.4% growth on group like-for-like sales. This is made up of U.K. stores contributing minus 1.3% and U.K. online plus 1.7%. The majority of the U.K. online growth was from the growth of pick and collect sales in store. In constant currency, our international stores in Denmark and Republic of Ireland and International online sales contributed a 0.3% reduction. So the group constant currency like-for-like was 0.1%. Including the impact of currency, the reported like-for-like was 3% growth. Our online sales channel continues to grow with sales of nearly 15% with EBITDA also growing. And most channel growth has been driven by mobile, with orders up 64% and click & collect, which makes 46% of online orders over peak. Online mix GTV now represents 16.8% for the group and 19% for the U.K. And Sergio will talk further about the improvements we're planning in this area, and the importance we're placing on mobile for the future strategy. As I said earlier, the gross margin rate was down 30 basis points from last year. There are 3 main components of the movements in gross margin. The first is the intake margin, which is close to 10 bps from last year. And I'll provide an update on our plans to mitigate currency on the next slide. Second, the strategy of refocusing our approach to promotions and planning prudently has enabled us to reduce stock by 4% and improve full price sell-through. This enabled us to deliver 50 bps improvements from lower markdowns.

Finally, sales mix had a negative 90 bps impact. This is a result of the category mix with gross margins diluted categories, such as cosmetics and gifting have outperformed, whereas we saw lower growth from our higher-margin womenswear category. [ There was also migration in ]concession areas was also margin -- gross margin dilutive. You'll see from the graph on the right, U.K. own bought mix has reduced from 79% down to 77.6% at the half. And we're clearly developing plans to mitigate the market-wide impact of the changing currency on our cost of goods. As I've previously outlined, approximately 30% of our own bought sourcing costs are in U.S. dollars. We are fully hedged for FY '17 at an average rate of around $1.50 for the pound, or 5% lower than last year. We are now hedged for the majority of FY '18 and, assuming current rates prevail, I'd expect to be hedged around $1.30 for the pound for FY '18. We have a number of levers to pull in order to mitigate the impact of currency from our results. Firstly, the investment we have previously outlined in our sourcing capabilities, opening a new office in Shanghai and doubling our intake in the Bangladesh office, our planned reduction in stock and options giving us opportunity to reduce further the number of factories and supplies we use. And also, we have more opportunity to be focused again on our promotional activity, which again will lead to further markdown opportunity. Our aim, however, is to remain competitive and to maintain our reputation of providing value for money for our customers.

Going to costs. The overall operating costs grew by 3.6% and were in line with expectations and the guidance we gave in October. U.K. store costs grew by 1%, driven by the net impact of living wage and store rental costs. Online costs grew as a result of the growth in that area and the mix into Beauty and Gifting, but were lower as a percentage of overall sales.

Total International costs grew by 15.2%. This came from a strong growth in online but also predominantly from the impact of currency. At a constant currency level, costs grew by 1.3%. We're pleased with the performance we're doing in this area, but our work is ongoing.

Now moving to the balance sheet and our cash position. As I've said before, the business is cash generative from its clear priorities with the use of cash. The first again remains to continue to invest in our strategy, which Sergio will outline later.

Secondly, we pay our shareholders a dividend. And thirdly, we have a medium-term target to reduce our debt. Before financing and taxation, we generated a cash flow of GBP 108.7 million. The strong cash flow is after spending GBP 47.5 million on capital expenditure. The working capital position includes a positive contribution for managing stocks, trade creditors and debtors and includes the GBP 5 million recovery plan payment into our pension scheme. As explained last year, the half 1 '16 working capital number did a GBP 20 million of favorable timing benefits reversing in the second half and in this year.

In October, we'd continued to plan prudently and reduced our stock levels, and we're on track with this. Overall stock reduced by around 3% compared with last year and by around 4% on a more like-for-like basis if we remove the impact of currency. The terminal stock percentage at the year-end was under control at 2.8% and in line with our historic low levels. Again, as I said earlier, we'll continue to invest in the business to support the strategy and to grow profitably. The capital expenditure of GBP 47.5 million was in line with our expectations and broadly the same as last year. In half 1 last year, we had 5 new stores versus no store openings in this half. You also note, we continue to weight more of our spend to systems developments as we invest in the group's multichannel business and new buying and merchandising systems. The investment has supported a growth in online. We still expect the full year CapEx to be in line with our guidance of around GBP 130 million.

So with strong operational cash flows and our use of cash, we've reduced our net debt by GBP 62 million since the year-end, we finished the half at GBP 216 million. Let me point out a couple of items on this slide. Firstly, the cash tax payments have returned to more normal levels, following the timing benefits last year from the adoption of FRS 101 in our subsidiary account. We expect the full year cash tax to be around GBP 20 million. You'll get more detail in the appendix. The financial leverage ratio at the half year has been maintained at 0.9x, and we're pleased with the progress we're making in this area. I'm going to finish with an update on our guidance for 2017. The guidance remains broadly unchanged except the operating gross margin, where we expect full year gross margin to be approximately 25 bps down for the full year. We've tightened up our cost guidance to plus 3% to plus 4% on a reported currency basis, or plus 1% to plus 2% on a constant currency basis. As Sergio will outline later, we expect to incur some non-underlying exceptional costs over the next 2 years, a proportion of those being incurred over the second half. We'll provide more detail on this in the full year results. I'd not expect any change to the underlying full year consensus profit number as a result of this performance today. That completes my updates on the financial performance. I'm going to hand over the strategy to Sergio.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [4]

--------------------------------------------------------------------------------

Well, I hope you like my glasses. They're very trendy. Well, good morning, all, then. Welcome to the strategy presentation. I'd like to start by thanking my team and all our colleagues for delivering the results that Matt just presented and also for helping shape the strategy that I'm going to be sharing with you today. We've called our new strategy, Debenhams Redesigned. I believe this is a strategy that is exciting, it's ambitious, but it's also grounded in reality. For those of you who don't know me, I would like to give you a little bit of my background. I am an unusual mix of Swiss and Spanish, and I've studied applied mathematics. So if I note, my mom always tells me that I've studied something very complicated, and I'll be selling jackets, shoes and makeup.

During my career, I've worked in many exciting cities, including Amsterdam, Barcelona, Paris and Zurich. My background defines me quite well. I'm someone with love for numbers construction, passion for creativity and an international mindset. If there's something that people know about me is that I joined Debenhams from Amazon. In fact, over 30 years, I've enjoyed a very varied career, having worked for DuPont, Inditex, Nike, Puma and -- as well as Amazon. Throughout my career, I have developed a deep understanding of sports, fashion, brands and large-scale bricks and motor retailing, the complexities of international retail and the realities of online shopping. This experience has given me some fundamental beliefs. I believe retailers need to create compelling reasons for customers to shop with them. I believe in shopping as a sociable and fun activity. But I also understand that convenience is non-negotiable. I believe in the power of meaningful and differentiated brands. I know that the most creative ideas only come true through a relentless focus on execution. And I believe in the past data to manage the business, understand my customers and make business decisions. I believe that offline needs online, but also that online needs offline. I believe that mobile is the new blood of retail. Mobile will not only unite the channels, it will also become the way we build the relationship with our customers. Since my arrival at Debenhams last October, I've conducted a deep review of every aspect of the business. We have conducted quantitative research with 16,000 shoppers and non-shoppers, and we've undertaken qualitative research on our proposition, our thought and tested new concepts for our products and our brand. I've taken a forensic look at the business. We created fully-loaded P&Ls for every category, store and every brand. We know not only how profitable every designer brand is now, we also know how they resonate with our customers, the impact of the fashion shows, how many people follow them on social media, how many times Debenhams was mentioned. We know our profitable -- we know our profitability through every week of the year and every promotion. We know how many hours we've spent serving customers or unloading trucks. And through this process, I've challenged every assumption, process, belief and tradition. I asked smart teams very tough questions, and I took a skeptical view of the answers until we got to the root causes of the issues identified. And I was impressed how positively my team has responded to this program. What I found is that we have some great strengths that give us a good foundation on which to build our strategy. And I also found we have a number of issues that we need to fix. And with my team, we've already started doing that. When I joined Debenhams, I was attracted by the opportunity to lead one of the most powerful brands in U.K. retail. And our research has reaffirmed that we have some great strengths to build on. Consumer research shows our reach and the scale of the opportunity. Our brand awareness is 97%, and 19 million customers in the U.K. shop with us every year. For many customers, our stores have been part of their family's lives for many, many years. And many of our 176 U.K. and Irish stores are in great locations, at the heart of the community. We have market-leading positions in important categories such as beauty and occasionwear. And we have very solid product creation engine. Our customers like our breadth of choice, our big event promotions and our beauty halls. We're the most -- we're one of the most visited online retailers in the U.K. with over 200 million visits to our website last year. And for the first time in some years, we are growing faster than the market online. We are one of the few U.K. retailers to have a profitable international business. We have over 1/4 of the units we sell sold overseas. And online, we ship to 60 countries. We have a successful separately branded business in Magasin du Nord. These are powerful assets we can leverage as we build a successful future for Debenhams. But I wouldn't be honest if I said everything is great. I also found areas of the company that needed fixing. And fixing them isn't going to be easy. Against a challenging market background, we'll need to put some significant effort, time and some investment into fixing them. Our customers tell us that we make it a hard work for them to shop with us. It's difficult to find someone to help, our stores are too clustered, there's too much product, and it's not differentiated enough. Some of our stores look tired and old. The online experience is not as good as it could be. And with so many promotions, our customers struggle to know when it's the right time to shop. While I was diving into the business, I found one SKU where the price had changed 18 times in the autumn season. That's just not helping our customers or our staff. Our real estate portfolio is variable and complex to manage. Our mobile platform does not give us the capabilities we need to live our strategy. It is a direct quote from one of our customers, "Debenhams is like a treasure hunt. There's some really great stuff, but you have to work hard to find it."

It is that issue that I'm determined to fix. As I have devised this strategy, I have started well obviously with the customers. Customers have changed, and Debenhams needs to change too. I've spent the past 20 years observing the changing behavior of our customers. By defining what we want to stand for and simplifying the way we operate, we can refocus our attention on what makes a difference to our customers today and to our shareholders in the future.

I mentioned earlier my theory of how people shop. Much of the retail industry's narrative today focuses on the story along the lines, it's all about online, convenience and price. I see the world differently and so do millions of customers. I see a world where customers are spending more on experiences, on doing things, not just buying stuff, a world where mobile is front and center of how they interact with each other. So what does that mean for shopping, fashion and beauty? Of course, the community shop exists. I want the 100% cotton shirt, trim sleeves, washes well, just like the other one I have, and I want it delivered tomorrow in the evening. We can do this. However, for many customers, shopping is a fun and exciting activity they enjoy, whether that's escaping for some quality me time or sharing with friends or with family. There is an emotional connection, not just with the product, but also with the process of shopping. Part of it is about these great items that is going to help you look better, younger, more professional, more relaxed or make me feel better, more confident, more glamorous. It's also about the journey itself, meeting your best friend, taking the train to Central London or Manchester or the car to Chelmsford, Dublin, Copenhagen or even the Mall of Dubai. It's about enjoying the complete experience, which may start by checking out what's new on your mobile that is trend and the process of makeup, the dress that will turn you into the star at the party tonight. It is about meeting up with your friends, trying 10 dresses on and asking other friends on WhatsApp, Twitter or Instagram for advice on which one to buy. It's about this amazing makeup that you had at the store that highlights the color of your eyes and how it affects if you look a little tired after a busy week, or how different your hair looks like after that quick fix blow dry. It's about the friendly service you got. And finally, it's about the selfie where you look a drop dead gorgeous and get 200 likes. So is this just my opinion, the view of a new guy in town. Well, no, the data supports it. Over the past 4 years, the growth in leisure, i.e, eating out, recreation, culture and hotels has been 50% higher than growth in retail sales. Many people now believe this is structural, not a cyclical shift in spending. As well as a survey of 16,000 customers across the U.K, we went on shopping tours with a group of shoppers across the country, in Debenhams and other stores. We asked them about their shopping habits in the categories that are important to us. Almost 2/3 of women told us that leisure is as important as or more important than convenience when they shop. Many of you might think, yes, this is how women shop. But the research also showed 1/2 of men are of the same opinion. We also asked customers, do they shop on their own, with their family or their friends? About 40% said that they shop with family or friends. Crucially, those people who shop with friends end up spending 80% more than when they are on their own. When measured against our competitors, Debenhams scores highly for both convenience and leisure and over-indexes in leisure. This is key to the future opportunity for us. We also asked customers about how they use the Internet and their mobile devices. We learned that customers associate their mobile phones with shopping in all channels, not just as an alternative to desktops. Desktops are seen as a fairly antiquated way of shopping, alone, at home, in the office, behind the desk, it's formal, it's for convenience. Mobile devices upfront can be used on the sofa, shared with friends, on the bus or train, on the way to school, to the office, on the high street, in a restaurant or in a store. We know that mobile phones are part of everyone's lives today. We asked them how they use their mobile phones in the context of shopping and leisure. The most frequent activities on a smartphone are to engage which means to write reviews, take opinions, comment on social media or check logistics, for example, store locations or product availability. Only 18% of respondents immediately purchase something on their mobile device after researching the product, but this is growing fast. Purchases on smartphone are expected to double in the U.K. over the next 2 to 3 years.

Currently, the growth in U.K. retail is all being driven by mobile. Mobile is the technology enabler, not just for online shopping, but for wider definition of shopping and the integrated activity we define as Social Shopping, which I will explain in a second. We believe the opportunity for us is to become the destination for Social Shopping, online and offline.

To summarize, customers are telling us that shopping for fashion and beauty is about 2 key elements. First, it's about the pleasure of buying a great product, a product that will help them look good, feel great. It's about helping our customers get that little extra confidence. But it's also about enjoying the whole process. It's about making the journey easy and fun. After all, many of them love shopping and sharing the experience with family and friends. So based on the -- on this understanding of our customers and how they shop and live their lives today, this is my mission for Debenhams. To make shopping confidence boosting, sociable and fun. We'll do this by creating the easiest way to help our customers look good, feel great and celebrate the love of shopping. It's about starting with what our customers want. Yes, I know it sounds obvious, all retail is fair. But it is something Debenhams needs to be better at. And I'm determined this is something we will be better at. We need to evolve from the push model, pushing product in high quantities to our sales floor and managing sell-through with promotions to a pull model, where customers' behaviors inform our product and their flow. We need to create products, brands and services that excite them, and we need to make it easier for them to buy from us.

Let me now take you to how this is going to translate into a meaningful and differentiated strategy. We are trying to transform the shopping experience at Debenhams. We want to create great reasons for customers to come to Debenhams, whether they're sitting at home, commuting on the train or enjoying their leisure time on the High Street and build a stronger, more personalized relationship with them, centered around mobile interaction. The mobile phone is front and center of how customers interact with each other, and it is an enabler for Social Shopping. We want to create an exciting online and offline environment for beauty and fashion, an environment that is engaging and inspiring, visual and sensory with great service. And a shopping journey that is convenient and reliable, so they will want to come back to us more often. We want them to share the experience. They can do this directly by visiting stores with friends and family to shop, eat and drink, use our beauty services or attend events with us all via social media. This is what we define as Social Shopping, a fun leisure activity enjoyed with friends or family and shared on social media. And it is at the heart of my new strategy for Debenhams. As my chairman would put it, it's not just about selling stuff, it's about wrapping it in a set of experiences. Compared with our competitors, we score well on those metrics, except shopping frequency. Our customers visit stores 2 to 3 times per year on average, although the highest value customers visit up to 12 times. There is a direct correlation between shopping across multiple categories and visit frequency. Customers who eat and drink with us or who purchase a service from us, visit our stores 3 times more frequently than those who do not. Put simply, the more customers consider us for more categories, the more often they visit us. If we could get an average customer to visit us 1 more time every year, we would add GBP 1 billion to our top line. To help us deliver this, we've built a plan that is good for our customers, good for our colleagues and therefore, good for our shareholders.

You've heard about our mission and about the opportunity to lead Social Shopping. Now, through the framework that you see here, I'm going to talk to you about how we'll deliver this. Our plan to drive growth -- our plan will drive growth and improve efficiency over the next 3 to 5 years and by doing so, create value for our shareholders.

First will come from what I'm calling the 3 Ds: Becoming a destination for Social Shopping, offering exciting new products and services; second, by being digital-driven with mobile unifying our channels and interaction with our customers; and third, by being different in how we create and manage plans and products, supported by a more innovative culture. We will improve efficiency by removing barriers to shopping online and in stores, by simplifying and focusing our storage space, our operating model and making better use of our resources. I will now take you through this plan in detail. We'll grow by becoming a destination. In order to drive frequency, we want to be at the top of our customers' consideration in 3 carefully chosen areas. First, I'm going to talk about how we'll step change our beauty offerings. We're one of U.K.'s leading retailers of premium beauty and are #1 in premium makeup. The launch of new makeup brands where we are increasingly the partner of choice in the U.K. for the leading beauty houses has also allowed us to broaden our appeal to a younger audience. Our ambition to become the clear market leader -- ambition is to become the clear market leader in premium beauty, building GBP 1 billion business, becoming the goods partner for key brands, the preferred destination for customers in all channels and step changing our online share in the category. We will do this by creating the most exciting and engaging physical and digital beauty hall in the industry. We will be the destination for new innovative brands and products, and we are looking at technology to create fun, personalized experiences, which our customers will want to share through Instagram and other social media. We will develop more aggressively into beauty services, both in stores and, potentially, at home, too. Beauty services is GBP 4 billion business in the U.K., just slightly smaller than the GBP 4.4 billion Beauty products business. The Beauty service market is highly fragmented and local. But with our local store presence and an average drive time to our stores of less than 20 minutes in the U.K., we feel real opportunity to grow share in this category. Makeovers, nail baths, rub baths, blow dry services. While we are high on our customers' consideration list for categories such as Beauty, we see the opportunity to improve our customers' consideration in a broader range of categories. These are not different customers, our Beauty customers are slightly younger than the overall average, but ultimately, it's the same customer. Of course, women's, men's and children's clothing will remain core to our business. Yet very few of our competitors have the space to build the most exciting shopping experience for categories such as bags, shoes, lingerie, jewelry and swimwear, we do. Our goal is to maximize the impact of this space and bring the spirit of the beauty hall into accessories. Space, comfortable seating, fast, efficient and friendly service, shoes and bra fitting, excellent visual merchandising will all be part of the menu. We may not realize that Debenhams is the market leader in the U.K. for bags, custom jewelry and swimwear.

In closing, our market share is 70% higher than it is in footwear, a GBP 7 billion market where we see a major opportunity. So with an inspiring environment, much better service and great products, whether our own brands, international exclusive brands or selective concession partners, I'm confident we can accelerate our performance in these categories. We are currently redesigning lingerie for autumn 2017. This will deliver an improved customer experience and an every day mix-and-match offer with regular newness. I've spent 5 years working in the lingerie business, and I can tell you we sell some of the best products in the market at really excellent prices, but we can sell better and more. We'll create exciting store environments that our current and new customers want to visit, where they can spend time with their family and friends, exploring our products and services in a relaxing and engaging atmosphere, and share the experiences online, on social media when they do. We'll step change our food and drink offer to best serve each location with a new format which is our own as well as building relationships with a wider and more innovative range of brand partners over the next 3 years. We plan to add at least 100 new offers across our store portfolio. We will reinvent in-store events with VIP access, entertainment, food and drink, fashion and beauty shows with our best customers first in line. We have the space and locations to do this in ways no other retailers can. This will lead to the engine of retail growth in the U.K. and a significant opportunity overseas. In order to give us the capability to live our strategy, we'll need to be mobile everywhere. For this, we'll need to invest in upgrading our technology platform. We fundamentally believe in mobile @ everywhere. It's not just about having a better mobile trading platform that will support faster online growth. It is about connecting with our customers via the device that you have with you all the time, with better functionality, better content and a more engaging spend. Mobile @ everywhere will become the platform that unifies our entire business. We see the growth of mobile as being central to Social Shopping. It's not just about selling products online, it's about building a closer relationship with our customers. It's about personalizing our interaction with them, leveraging the data this provides to introduce them to products, services they may not otherwise have considered. And it's about enhancing our customers' experience in-store by helping them to interact with the outside world. We see important opportunities in personalizing service and experience in how we manage our loyalty platform. For example, in due course, it will give us the capabilities to move our 1.2 million Beauty Club cardholders from plastic to their mobiles. It will allow customers to receive personalized promotions and service as they come through the door. We have a number of new ideas in test, and we'll report back to you on our progress later this year. Click & collect has become an important part of the business. Over 30% of online transactions are picked up in-store. We know that of these click & collect customers, almost 20% buy more while they are in the store. This showed great opportunity to evolve this experience from being functional and reliable to leisure experience in its own right. This is what we are calling click, collect & play. And this is an important element of our determination to lead it in Social Shopping. We'll improve our in-store service and mobile digital experiences, and we are testing some new ideas, the first of which we'll try this autumn. This is very much a pilot concept, but let me share some of our thinking with you. For example, we'll try linking click & collect with personal shopping. Our customers will be able to select items online, and at the same time, book an appointment with our personal stylist who will handpick a range of matching items. When the customer arrives at the store with friends or by herself, she'll find the items waiting in our personal shopping suite, enjoy refreshments and share the experience on social media. This area has the potential for us to test strategic partnership in a number of categories that are complementary to our existing offers, in order to create an exciting and differentiated proposition. Digital distribution allows us to reach different customer demographic who may not otherwise shop with us. We've had good success in selling our brands via other online partners, both in the U.K. and internationally. We are already selling digitally overseas, delivering to 60 countries worldwide, whereas our store presence outside the U.K. is limited to 26 countries. There are obvious opportunities to increase over digital distribution, whether through our own existing infrastructure or via building strategic partnerships with third parties. Online shopping via mobile is already even further advanced in some overseas markets than it is in the U.K. As an example of how we can increase digital distribution, we're building our presence in some marketplaces, having just launched some of our brands on Amazon Prime in the U.K. We're launched on Amazon in Germany in June. We are already selling brands into continental Europe on Zalando and into Asian markets via Zalora. We'll talk to you in more detail in October about our plan to broaden our reach internationally. Initial growth will be an important area of focus, including for Magasin du Nord, which already has a successful domestic online growth strategy.

Now, I will turn to how we're going to differentiate our brands, products and services more effectively. We have a successful history of developing our own product with 5 of our brands generating annual sales of more than GBP 100 million each. We have an opportunity to drive growth by focusing on what makes us different, both in how we create and manage our brands and products, and when I say brands, that could be our own or selective third-party brands, supported by a more innovative culture. Customers tell us that designers at Debenhams has value and the proposition remains relevant. They associated with us in a positive way. I absolutely view it as an asset to Debenhams. But our customers also told us that it has lost some of its currency over time. We'll breathe new life into designers at Debenhams to make it a growth engine in its own right. We'll manage the brand's life cycle much more robustly, which means building new brands, while phasing out those that no longer have relevance. We'll strengthen the skill of designers by adding new names, both established and upcoming designers. And we've just launched this season's Studio by Preen. As a result of our research, you'll remember that I said earlier, we know not only how profitable every designer brand is, we also know how they resonate with our customers, the impact of the fashion shows and how many people troll them on social media. We know not only how -- we know now how profitable they could be. Our focus will be on using this data to build stronger and more meaningful brands, developing the online presence and individual brand equity. We have already begun testing remerchandising some of our designer brands in 2 stores. We have reduced stock densities by around 20%, supported by a more frequent replacement. This allows a more premium presentation of the product, and although it's still very early days, we're really encouraged by the results.

We want to create and distribute our brands in a different way. Today, we have too much slow-moving stock, and our brand proposition and price points sometimes overlap. We also arranged to fill fixtures and store sizes rather than range to customer demand. In the future, we'll deal with brand ranges for our online customers first. We'll then edit our store ranges based on the insights from customer segmentations and online catchment profile. As I touched on when I was talking about designers, we have a strong product creation engine. We have built successful brands that have strong demands through third-party partnerships, such as ATA, Lipsy, Zalando and Zalora that focus on a younger, more fashion-forward demographic. There is potential to take a refreshed product offering much further. We'll develop strong differentiated brands that can leverage our resource and infrastructure to be marketed both inside Debenhams and with a life outside of Debenhams too with international appeal. We will also become a destination where selective third-party brands will be able to grow into an environment and with a service compatible with their brand equity. Culture is a fundamental part of the success of any company. We have almost 30,000 colleagues who have talent, enthusiasm and ambition. Culture is the catalyst to unleash the energy that exists in our organization. However, our culture has been process-driven and head-office-led, rather than starting with the customer. Instead of using data, the data we have to support a bold decision making, we have been risk averse, and this has stifled creativity and innovation. We have already changed our head office into a support center, encouraging those at the center into the mindsets that we are there to support our customer-facing colleagues, not to load them with talks. Our culture will evolve to become focused on our customers, grounded in data and process execution, but also to help us become a creatively inspired business. We are a fashion company and a brand creator with a lot of talent in our business. And we have -- and we will organize ourselves to encourage innovation, the development of that talent and data driven, rather than opinion-led decision making. And to speed up innovation and effective execution, we'll look to be more agile where we need and form strategic partnership.

I have described the growth drivers across destination, digital and different. Now we'll talk about how we'll simplify and focus the business to drive efficiency, which will support delivery of shareholder value.

Firstly, how well we're going to make our storage data fit for the future. It's worth remembering that we have 176 stores in the U.K. and Ireland, not 300 or 400. And most of them are in key retail destinations with long-term healthy prospects. However, the way we manage our stores introduces complexity into our operations. As I've told you, we'll raise them by size, not by customer profile. And we have stores ranging from 13,000 to 200,000 square feet. We have conducted a full review of our store portfolio, including individual store P&Ls. Although we have a wide variation across our estate, we don't have the tail of loss-making stores. We have 1 store that loses money but it makes a contribution. Still, we want our store portfolio to be fit for the future. We have rolled forward our store P&Ls on conservative assumptions to identify those that could become unprofitable in the future. We have clustered the stores to get the best possible view of how we make the best return in each location. As a result of this work, we have developed a clear strategy for each location. We'll go into more details in our -- on our real estate plans in October. But for now, the key element is that we'll review up to 10 stores for closure over the next 5 years. We will repurpose some of those stores as outlets with test locations opening later this year. We'll invest in our stores in the major shopping destinations and where we see the greatest opportunity to earn a good return. We will refresh and remerchandise the rest. If there's one thing I learned at Amazon, it was to test and learn, test and demonstrate a satisfactory return before going ahead with an investment. The most customer-friendly companies I have worked for have a relentless focus on quality of execution behind the scenes. We have embarked on a review of our processes and the way we do business in all areas to simplify them. Our task-based product push approach has introduced enormous complexity in the way we operate. We want to reduce complexity and increase flexibility in the supply chain, which will allow us to shorten lead times and improve stock spend.

In the past 4 years, we have spent 40% to 50% of our CapEx on supply chain and IT. This has allowed us to bring the company to a better level. We are halfway through replacing our legacy systems, and we'll need to accelerate this program to deliver this strategy. We are investing in automation within our warehouses which will significantly reduce the cost of processing orders. Mobile and online play a pivotal role in our business. But as important as the channels themselves is the way we -- the way they integrate with our stores to create a fun shopping experience. Our current platform does not give us the capabilities we need to move to the next level in mobile interaction. So we will upgrade our systems in order to support our Social Shopping ambition. We have almost 30,000 colleagues at Debenhams and our previous task-based approach has meant too much of their time has been spent on back-of-house function. In order to serve our customers better and in order to encourage creativity and innovation, we have embarked on a process of eliminating unnecessary staff and function. We'll move nearly 2,000 store staff from operational to customer-facing activity. This is 5 additional colleagues in a small store and over 50 in a large one. We will roll out a program of staff training service over the summer to make sure our colleagues are equipped to provide the best service. Although we have made progress in recent years in reducing stock options, we still push too much inventory into the stores. This results in high store density, poor visual merchandising and leads to high markdowns. We will flow stock more efficiently, reduce in-store density and replenish more frequently and faster. We aim to reduce our sale to replenishment lead times from an average 8 days currently to 2 days. Making better use of our inventory -- by making better use of our inventory, we'll be able to improve our sell through at full cost. You will have heard us talk about our move to single warehouse management system. And we are now in the final stages of transitioning to this system. As a result of our more efficient stock close, we are now in consultation to close 1 of our existing 3 distribution centers. And we expect to close and consolidate 10 of our smaller, regional warehouses over the next 12 months.

Before I wrap up on the strategy and our time frame, I'd just like to touch on our International business. Of course, all of the elements of our strategy apply to how we will approach our International operations. We are developing a plan to broaden our reach across channels, brands and markets, and we'll come back to talk to you in more detail on this in October.

In the meantime, I would just like to highlight where we are and the key components of our future plan. We have some strong long-term relationships with strategic partners, but a long tail of smaller, less profitable ones. We'll simplify our business, looking to close some low-profit, low-scale partners. We'll leverage and grow our existing successful partnership. We'll develop new online growth opportunities, and we'll look to exploit the benefits of Debenhams Redesigned in International markets. Magasin du Nord is a successful stand-alone business with a plan for growth. It has a strong online growth momentum within its domestic market. In the coming months, our Danish business will launch 200 new brands online with the ambition to position Magasin as the digital destination for cool Scandinavian brands, leveraging our existing International fulfillment platform. We're already hard at work on our plan. In January, I've talked to our teams to get on with fixing those things that we need to fix while we finalize the strategy. Here are some of the key changes that we have already actioned, some of which I've touched on. So I won't be repeating them.

This slide gives you an indication of the timeframe of our program of work. We are starting from our [ trial ] with some further initiatives landing this autumn/winter. For example, as well as testing option reduction in a significantly improved visual merchandising in 2 lingerie departments, we will redesign the online experience. We are testing an improved store format in 2 locations and remerchandising designer brands in 2 other stores. We'll redesign our online room to our presentation. Having solidly tested these through peak, we'll begin roll out next year. Within 3 years, you should see a real change at Debenhams. Throughout this timeframe as we look to simplify our business, there will be a number of activities we're going to stop doing. We'll exit some brands and designers. We'll exit some of our noncore international markets. We will close some stores. We'll be able to give you a little more clarity on what we will do and when, in October. This timeframe, however, doesn't describe an important fact. I'm clear that we can't wait around to change how we do things. That's why we started the fast-track plan already. I'm a man on a mission, and we'll be making changes at pace.

I will now take you through the financial implications of our investments and divestment plan. We will be investing to deliver our strategy. We will invest in marketing in the autumn to support further improvements in full price sales. We will see benefits from the better use of resources that I outlined earlier, which will help to offset the inflation in our cost base. We'll increase CapEx from our recent run rate of GBP 130 million per annum to around GBP 150 million for each of the next 3 years. This will allow us to complete the replacement of our systems, accelerate our automation plans, upgrade our digital platform to a fully flexible mobile-led system and invest in our evolving store estate. We are allocating capital in areas where we expect to deliver a significant return. As a result, we expect net debt to hold broadly flat until fiscal year '20, when we expect cash generation to start to reduce debt levels again. The exceptional costs arising from our strategy will be approximately GBP 50 million in total, of which half will be cash. This will be spread across the next 3 years. We will provide further information on this in October, when we will also explain in more detail how we'll measure the success of our strategy. We have confirmed today that we are maintaining our interim dividend and our policy will be to continue to aim towards the cover of around 2x underlying earnings.

So to summarize, we have delivered a solid performance in the first half of the year, in line with market expectation. Our diversified business model, together with strong cash generation, means that Debenhams is in good shape to withstand a market background that remains uncertain. We are, of course, at the beginning of the journey towards Debenhams Redesigned. Here's a reminder of the framework of the strategy. You will see this slide again in the future as we report back on our program. Debenhams has some great assets that we can leverage, and we have self-help program to Fix the Basics that is already delivering change. To our focus on growth and efficiency, Debenhams Redesigned is a strategy that will deliver a step change in customers' experience. This, in turn, will translate into shareholders' value. Put simply, our ambition is that shopping with Debenhams should be effortless, reliable and fun. If we deliver this, our customers will visit us more frequently and having simplified our operations to make us more efficient, will set Debenhams on course for a successful and profitable future. Welcome to Social Shopping. Thank you.

--------------------------------------------------------------------------------

Ian Cheshire, Debenhams plc - Non-Executive Chairman [5]

--------------------------------------------------------------------------------

Very good. I think we're going to -- into questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Caroline Gulliver, Jefferies LLC, Research Division - Equity Analyst [1]

--------------------------------------------------------------------------------

Caroline Gulliver from Jefferies. Two questions to kick us off, if I may. The first is on the new mobile platform, which you've talked about mobile being so important. Just a few questions. First of all, is this something you'll be developing in-house or will you be using a partner? I wonder if you could tell us the approximate cost of it within your revised CapEx guidance. And also, what are some of the functions you think you're missing at the moment? Or what are some of the really new things that you're intending to do with this mobile platform that you will be introducing? And then my second question was around some of the new initiatives around Beauty, and in particular, Beauty services and the profitability. I'm assuming that they will be coming onstream with a higher profitability than the existing Beauty, which is obviously diluting the overall group. Just wondered if you could comment on that. And then as a follow-up on some of the initiatives that are in personal shopping, is that something you're going to be offering for free or to inspire further purchases? Or will you be charging for that?

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [2]

--------------------------------------------------------------------------------

That's quite a few questions. Thank you.

--------------------------------------------------------------------------------

Caroline Gulliver, Jefferies LLC, Research Division - Equity Analyst [3]

--------------------------------------------------------------------------------

I could go on, but I thought the other people want to ask questions too.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [4]

--------------------------------------------------------------------------------

I captured everything. All right, let me start with mobile first. And let me start with the last question on mobile, what are we going to do. And as I said, mobile first is really the new blood of retail. It's what connects everything within the shopping experience. So we want to be able to do a number of things. Some of them are normal, like trading online, being able to buy products online in a more exciting, faster, simpler way. The second thing we're trying to do as well is to be able to move our customers, as I mentioned, our 1.2 million Beauty card cardholders from plastics to mobile. And we also want our customers to be able to come into the stores and be prompted with promotions, perks, ideas. We want to be able to interact in a way that is different and the level of integration that we will need from our mobile platform is different than what it allows us to do things, okay? In terms of technology and costs, I would say, it's not something that technology we have addressed yet. We know the direction we want to go into and the process we're going to start as we complete. Matt, maybe you wanted to comment on something?

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [5]

--------------------------------------------------------------------------------

On the cost front, I mean, all I can say is we have a few options available clearly. And we're looking at those at the moment. So until we have those further firmed up, we can't confirm on the costs. But the CapEx is in the guidance that we talked about today. So that's something . . .

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [6]

--------------------------------------------------------------------------------

And you had some questions on Beauty services, what they are going to be like and their profitability. I'm sorry, you started the question on mobile and said, are you going to develop that yourselves or go for partnerships? I think that we're going to be very open. One thing you know when you look at technology is that when you make very long programs of investments, once you deliver them, they're already obsolete. So we're going to be tactical in the way we look at our development. We're going to look for external partners, and probably, we'll have a mix of the 2, internal development and external development. Beauty services, I think it's a fabulous opportunity. GBP 4 billion in the U.K. It is very fragmented, and I think, that our strength in Beauty services is that our stores, on an average, 17 minutes away from our customers. So we are reasonably close to our customers. People can come to our stores for these services, and we think it's a great opportunity. But as I said in my presentation, we're looking at this with 2 different angles; Beauty services in-stores, but also Beauty services online, you know. I'm sorry, Beauty services in stores and Beauty services at home as well. So this is a new territory for us, as well. And also we have built a fairly robust business plan. We have some interesting ideas we're exploring, and we'll have to probably tell you a bit more about them in the future. You had a question on personal shopping as well. Again, charging, sorry. That's a possibility we might consider. I think that -- we're not looking necessarily at some of these services as revenue streams, could be, we might look into it. I think what is really important is that we want to reward our loyal customers, and possibly, some of the services that we'll be offering will be charged for and some services we'll be offering will be really focused on our loyal customers. And as I said, our goal is really to increase frequency. Remember that number, and if we get our average customer to come one more time every year, it would add an additional GBP 1 billion to the channel.

--------------------------------------------------------------------------------

Suzanne Marie Harlow, Debenhams plc - Group Trading Director and Executive Director [7]

--------------------------------------------------------------------------------

So on the (inaudible) something like Brow Bar, what customers do is they do visit more frequently and they spend more when they do visit as well. So you tend to train them for services and products as well. And that's just on a fairly small existing business.

--------------------------------------------------------------------------------

Tom Trevor Walter Gadsby, Liberum Capital Limited, Research Division - Analyst [8]

--------------------------------------------------------------------------------

Tom Gadsby from Liberum. I've got a couple of questions. First is on, you talked about push versus pull. Are you looking to replicate something of an intertext model as a feedback loop from store managers, shortening lead times crucially. Is that something that is on your radar? And then secondly, probably more one for Ian, perhaps, but what benchmarks for success are you setting the board under the new strategy in terms of annual bonus and LTIPs?

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [9]

--------------------------------------------------------------------------------

Let's see. Before I hand over to Suzanne to talk about lead times, there's one thing that I've learned moving from one company to another is that you can't replicate the business model of the company to another one. We're a company with 200 years of history and there's a number of things that have made us successful. Now having the right product at the right time at the right place is key. And to do that, you don't have to replicate [ that ]. Suzanne?

--------------------------------------------------------------------------------

Suzanne Marie Harlow, Debenhams plc - Group Trading Director and Executive Director [10]

--------------------------------------------------------------------------------

Just adding to what Sergio said, just in terms of lead times, I think I spoke about this before. Lead time is not just about (inaudible). Really importantly, it's about shortening lead times and improving the process throughout all that we do. So that's a bit of process that we have in terms of sign-offs, in terms of fit, in terms of (inaudible). So we have a plan and a prospect map for each country of origin, and more importantly, for each product category. So something like footwear versus lingerie versus clothing that requires a different set of processes. So I'm always at great pains to say, speeding up lead times across the fleet is hugely important, and we're just redefining what those metrics are. With that said, a part of mitigating some of the risks this season like ForEx, we have grown our direct sourcing. So the sourcing that we do through our own offices. And that's gone up 25%. Matt touched on it earlier on one of his slides. And that's grown from 17% last year. What you have seen is a big growth coming through Bangladesh, which by nature, is slightly longer lead times. But we've offset that by growth in both [ Middle East ] and Turkey.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [11]

--------------------------------------------------------------------------------

I think I will hijack the question on -- that you addressed to Ian. If you don't mind, Ian. How are we going to be measuring success. In October, we will get back to you with the KPIs that we're going to be using to measure our success. We don't have those details here, but I would say that we should expect to have 3 blocks of KPIs, customer-focused KPIs that will influence probably MPS, operational KPIs and financial KPIs. And in the financial KPIs, we should probably expect to find something that's called [ the return on investment ]. These are the 3 areas we're looking at, and we'll get back to you in more detail in October, then.

--------------------------------------------------------------------------------

Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - Analyst [12]

--------------------------------------------------------------------------------

Richard Chamberlain, RBC. I have a couple of broad questions, please. First of all, Matt, you can talk around the thinking behind holding the dividend and future dividend policy, given the high cash or the requirements for at least short-term modernizing the business. That's the first one. And the second one is, Sergio, I guess the 10 stores that have been broadly put up for review over the next 5 years. Can you just talk around some of the assumptions behind that? So online penetration maybe, likely exit costs, how materially underperforming are those stores, size of those stores. And any kind of color you can give on that, I think, will be pretty helpful.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [13]

--------------------------------------------------------------------------------

Let's start with the dividend. I think that's a great question, actually, for [ Matthew ].

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [14]

--------------------------------------------------------------------------------

Maybe I will pick it up, actually. Richard, so on the dividend policy, I think we said before we're clearly cashed in, and we've seen that in our previous results, and again today. We set out 3 priorities for our cash. The first is to invest in our strategy a bit, that's the investment you're seeing today. The second is to pay a dividend. And the third is to reduce net debt. And actually, we believe we do all those 3. Actually that's why we're comfortable with the dividend policy going forward. And also the dividend we're maintaining for the first half. We said it -- around 2 times cover going forward. And so with our expectations of the future performance investing in the strategy, we believe that the dividend policy can be at that level. And also the net debt actually, it's consistent over the last year for the next 3 years, and then reducing thereafter. Either way, a very manageable ratio on that side of the business. So we're comfortable with those -- the combination of those 3 uses of cash.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [15]

--------------------------------------------------------------------------------

On the store front, I think Debenhams is the first company I have worked for, and I'm [ surely on ] -- only has one unprofitable store. I've worked in many other retailers where you had a (inaudible). So just reminding you that the store still makes a contribution. So the assumptions we have made were -- are fairly conservative. And basically, we're not saying that these stores aren't profitable. We say that they run the risk of becoming unprofitable. So we'll have some attention on these stores to make sure that we are able to change the situation, as I said, we'll probably repurpose some of these into outlets. We might be exiting some of them. But to be honest, although I understand that 10 stores can make a headline, it's just normal management of the real estate portfolio of any retailer. And to be asked as well, 90% of my attention is going to be on making the great stores, the hardline stores profitable, exciting, suitable for Social Shopping. That's where all our energy is. I think those potential 10 closures is what I put into just business as usual.

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [16]

--------------------------------------------------------------------------------

I'll just (inaudible). You asked about the cost of those. So we talked -- say, about a estimate of GBP 50 million of exceptional [ under nonunderlying ] costs linked to the strategy. I think it's probably 3 components. One of those would be linked to our views, when they are completed. What those expect potentially impairments and cost -- cash costs continue for those store closures. Again, within, that's over the course of the next 5 years. So we haven't got a number to kind of quote on those 10 stores, but when we come to October, we have to be a bit more refined, I think, on the buckets that they expected to (inaudible) within there.

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [18]

--------------------------------------------------------------------------------

Okay, yes. Absolutely. So the additional CapEx we're talking about today is predominantly focused on digital and systems investments, particularly, in (inaudible). That's where we think the highest return will be and that's where I think the investment is going to deliver that part of the strategy. Already we have an ongoing maintenance program and that continues. We saw that on the slides, which showed the CapEx shape. So we would expect to continue with an ongoing level of maintenance. But also we've touched many of our stores as we point to the end of the year as well where we're introducing new offer or when we put a new offering or new clothing offering or we change stores around, there's an opportunity to touch the store regularly. So it's not that we believe our stores can provide for 10 years and nothing happens to them, we constantly have an opportunity to introduce new offers and therefore refine how those stores look.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [19]

--------------------------------------------------------------------------------

One of the first decisions I made when I joined Debenhams within a month was to put on a hold all the modernization programs we had. Because what is clear to me is that our store in the future is probably going to be different than what we have today. Now as I said in the presentation, I think we're going to test and learn an awful lot. And I think that over the next 12 months, we're going to test a lot of things. And the results of these tests are going to inform our thoughts, we're going to be investing in the store space in the future. So that's why the numbers are still working prudently.

--------------------------------------------------------------------------------

Warwick Okines, Deutsche Bank AG, Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

This is Warwick Okines from Deutsche Bank. Two questions, please. Firstly, on your store estate. Could you just talk a little bit about your thoughts around the outlet, is that just solving a problem in a location? Or does it have any implications in your approach to clearing some promotions more broadly across the estate? And secondly, on Ireland. You made a EUR 6 million loss last year. Can you talk about where you expect that to be this year? I mean, you've already said unlikely to be in profit. And also where you think you might move next year, just as a bridge for our forecast?

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [21]

--------------------------------------------------------------------------------

Yes, I will take that. It's a wonderful business. I've run out of businesses in the past for Nike [ system ] out there. They are a really interesting business because they address a specific customer, that is probably much more value focused. I think in our ambition to lead in Social Shopping, what we want is to make sure that the experience in our existing stores is great at all times. And I'm not quite sure that leaving bits and boxes of products hanging in the stores is the best way to have a great experience. So it's probably also not the most effective way to get rid of that product. These stores are still on fairly [ high streets ] on the stores. So we really needed to look at the move to our place as a way to increase the shopping experience, improve the shopping experience in our -- in our core stores. But at the same time, the outlet business is a great business, and I think that we can make money out of them.

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [22]

--------------------------------------------------------------------------------

On the Ireland point. So last year, Ireland lost about [ GBP 6 million ]. We went through an examinership process. That was successful. We came out of that last year. So I'm going to give detailed guidance on one of our subsidiaries. But what I would say is that I also expect to have a small loss this year. And then moving into breakeven next year. And then (inaudible) before we're on track with that store.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

You've obviously chosen not to give any financial targets for the new strategy. And I guess I can understand why. But the question I would ask is, are you anticipating the group being significantly more profitable in 5 years' time than it is today?

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [24]

--------------------------------------------------------------------------------

I think what we wanted to do today is really to focus our message on the fact that we have a clear strategy, know where we want to go. We've created, actually, 12 [ direct streams and certainly ] working very detail plans. We start executing all the ideas we have. But as I said before, there's a lot of testing and trying we're going to have to do over the next 2 months. And that will help us inform, I would say, our business plans for the future.

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [25]

--------------------------------------------------------------------------------

I just had a little bit. I think Sergio is absolutely right. But I think I would add that we would expect profit progression over the course of that strategy and the focus on returns. So we would expect proper progression over the course of next year.

--------------------------------------------------------------------------------

Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [26]

--------------------------------------------------------------------------------

Kate Calvert from Investec. Couple of questions. Can we go back to the store estate. You talked about wanting to invest in some flagship stores major shopping centers. So what proportion of your portfolio do you think are flagship major shopping centers? And what sort of CapEx (inaudible) that you might spend on new stores versus the rest of the estate? The second question is by sort of the end of this program in 5 years' time, what do you think your concession owned brand mix is likely to be? Are you moving more to concessions, as you go forward? And the final question is, can you sort of give a bit of more of a flavor to how you expect the Social Shopping experience at Debenhams to be different than the one found in a shopping center?

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [27]

--------------------------------------------------------------------------------

You select the first one?

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [28]

--------------------------------------------------------------------------------

Yes. So, Kate, let me kick off with the first one around the investment. So as Sergio said, we're going to be needing some testing to learn as we go clearly, as you'd expect us to. So we're not here today to quote out pound per square foot investment for our key stores. But what I would say is that we think the biggest return would come from our flagship and our major shopping destinations, as you would expect. Those represent about 1/3 of our overall store kind of portfolio. And that's all we're looking to put on our investment first and see some results. We are doing a couple of those actually by the end of this year. So we'll be able to talk about those in October and actually customers through peak and then decide thereafter how we're going to roll those out. There's probably the key points on the store investment CapEx piece on that one.

--------------------------------------------------------------------------------

Suzanne Marie Harlow, Debenhams plc - Group Trading Director and Executive Director [29]

--------------------------------------------------------------------------------

Just in terms of the question around the end of 5 years' concessions on brand mix, can I give you a number on that today? No, I can't. What I would say is the sort of diagnostic work that we've done has gone through every single category and every single concession, own brand, wholesale brand that fits within that. And what we are now doing is working through the plan of what the opportunities are. What we can impact more for winter, which we can impact on some categories. And I mean just to give you a flavor of that, let's say, on lingerie, there's a bigger opportunity in our own brand lingerie, which is highly profitable, very successful. And whereas if I look at our womenswear business, we have got essentially an owned brand womenswear business and a concession business, and there's an opportunity to grow wholesale brands. So we'd just launch Mango in the last month. That has been very successful and that is relatively new within womenswear. So there's more opportunity to grow that. So we've got all the data. It's just now working through different categories to put it into action.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [30]

--------------------------------------------------------------------------------

And your third question is about differentiation with the shopping centers. It is clear that in shopping centers are offering (inaudible). Those centers that do it extremely well are frequently sort of centers where we perform very well, because if you remember that our customers here at Debenhams all indexes are on leisure. So the differences that I can think of is basically retail products. Retail products, we control the expense because we manage the stores ourselves. But probably most importantly, we have data, we have information. We know things about our customers in order to be able to personalize our relationships and our interaction with them. So I would say, great usage of the center is social destination. I think that as we grow this strategy, we have some key elements that will be very differentiated. And that will be probably make that leisure destination even more exciting.

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [31]

--------------------------------------------------------------------------------

I want to emphasize those things. Westfield in London, for example, is one of the highest food offerings in the shopping center, actually. And our store in Westfield has food -- has 4 food offerings in it as well. Actually, that's performing exceptionally well. So I think we can amplify what centers do, actually, without it being a distraction of what we can do and actually we can build on top of that.

--------------------------------------------------------------------------------

Adam G. Cochrane, UBS Investment Bank, Research Division - Executive Director and Analyst [32]

--------------------------------------------------------------------------------

It's Adam Cochrane, UBS. Can you just clarify, when you're talking about the dividend, you talk about you're aiming to get the cover to 2.0x. So that, come next year, you're going to go from where we are today to 2-point or you'd stay at 2.0x. If the profit projections then turn out, as you expected, does that change your sort of dividend in actual cash return decision and you can aim for that 2.0x. Is that the understanding I should take away that next year will be 2.0x, whatever the EPS is?

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [33]

--------------------------------------------------------------------------------

Okay. I think you probably will be analyzing a little bit. I mean what I'd probably say -- what I probably add is that we're -- it's over 2x now, actually. And looking forward, we would expect to be around 2x going forward. So the aim isn't anymore than just a hoping for the best statement that you said. We look around 2x going forward. We're comfortable at that level of dividend cover. And that cash flow (inaudible) as well. So that's how we think about it. We're around just over 2x now. Would expect to be around 2x over the next few years.

--------------------------------------------------------------------------------

Adam G. Cochrane, UBS Investment Bank, Research Division - Executive Director and Analyst [34]

--------------------------------------------------------------------------------

So the 0.5x net debt-to-EBITDA, is midterm within the course of the FY '20 or do you expect it's beyond that?

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [35]

--------------------------------------------------------------------------------

No. I'd say midterm's probably a little bit beyond that. So we said today that net debt would stay around the GBP 280 million level. Last year's level for the next 3 years. That's through to FY '20. The midterm can be, perhaps, a little bit beyond FY '20. So we would expect beyond FY '20, the net debt to reduce as cash flow benefits come through, and as the CapEx reduces accordingly. And therefore, that will have been (inaudible) 0.5x over the year or so thereafter.

--------------------------------------------------------------------------------

Adam G. Cochrane, UBS Investment Bank, Research Division - Executive Director and Analyst [36]

--------------------------------------------------------------------------------

And one. In terms of gross margin in the second half, and with the initial moving parts, would you expect there to be less of a negative drag from health and beauty given it's historically a bit smaller within the mix in the second half?

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [37]

--------------------------------------------------------------------------------

Yes, I would. Yes, I would. Correct.

--------------------------------------------------------------------------------

Tony Shiret, Haitong Bank S.A., Research Division - Retail Analyst [38]

--------------------------------------------------------------------------------

Tony Shiret. Just a couple of things. First of all, you talked about the push to core system. You mentioned that's going to involve a fair revamp of your buying systems at some point. I don't think it's set up that way in particular at this moment. Could you give us some idea of how much change in the buying system will be required? And when it's going to happen? And the second thing is in terms of the Social Shopping system that you described, just finding a bit difficult to make the connection between that and what you've got at the moment in terms of customers. I just wonder what the average age of your customers is at the moment? And whether you would regard them as the social media type of generation? And how much sort of your current customer base is going to have to move to get you to this sort of Social Shopping nirvana?

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [39]

--------------------------------------------------------------------------------

Let me start with the Social Shopping nirvana, Tony. We have 19 million customers. I suspect that, there's not 19 million people in this country that don't have a mobile. My mom is 82 years old and has a mobile and knows how to use it. The average age of our customer is 45 years old. So it's slightly above the average. So I think that's -- we're very proud of the customer base we have. I would agree with you there is probably a gap between where we are today in shop environments and what we want to deliver. Better, I would say, over the next 3 years, you will definitely see a change at Debenhams. So, no, I don't think that we have a disconnect between our customer base and what we're trying to deliver, that's the answer. Then on to your question on...

--------------------------------------------------------------------------------

Suzanne Marie Harlow, Debenhams plc - Group Trading Director and Executive Director [40]

--------------------------------------------------------------------------------

Yes. You talked before certainly about the broadly, the BNM roadmap. And we started on journey about 3 months ago. The first half of that was to deliver a product lifelike management store, which is just currently being rolled out across the business. And then over the next 3 years, we have plans in works to deliver an improved [ funding ], merchandising, forecasting tool. So that's quite a detailed program for us, clearly, and Peter is fully involved in this, as I am. So we are at the very early stages of that roll-out plan. And yes, you're absolutely right, [ it will require a store ] differently.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [41]

--------------------------------------------------------------------------------

And I will just add a bit too. And we're already making some significant changes to our supply chain as well doing on that. We haven't got to wait for the systems [ to land in ] for 2 to 3 years' time. So for today, we're reducing our lead time from (inaudible) from 8 days to 2 days. So we can already kind of move without fully integrated systems into this kind of approach as well.

--------------------------------------------------------------------------------

Tony Shiret, Haitong Bank S.A., Research Division - Retail Analyst [42]

--------------------------------------------------------------------------------

But to do that, due to days lead time, presumably, you're just going to have to hold more stock in a holding position, somewhere in the supply chain move stock forward rather? I mean presumably, it's largely sort of preplanned, everything that goes into store (inaudible).

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [43]

--------------------------------------------------------------------------------

Absolutely right. So actually we're doing that now. So over the course of the summer, we're moving from 8 days to 2 days. So that will be in place for this year. So that's exactly right. So we're moving our stockholding, removed from stores to our central distribution centers, and then allocating it to stores in a more scientific approach and having more replenishment opportunities. That will lead to improved availability and higher full-priced opportunity. So we wouldn't be letting the stock in the wrong locations. That's happening now.

--------------------------------------------------------------------------------

Sergio Bucher, Debenhams plc - CEO and Director [44]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Ian Cheshire, Debenhams plc - Non-Executive Chairman [45]

--------------------------------------------------------------------------------

All right.

--------------------------------------------------------------------------------

Matthew George Smith, Debenhams plc - CFO and Director [46]

--------------------------------------------------------------------------------

Are we done?

--------------------------------------------------------------------------------

Ian Cheshire, Debenhams plc - Non-Executive Chairman [47]

--------------------------------------------------------------------------------

I think we are. So thanks a lot all for your attention, and we very much looking forward to updating you in October on the steps that we will have carried out around Social Shopping. Thank you.