Shares in Debenhams (LSE: DEB) have largely tracked the wider index after issuing a profit warning six months ago. Indeed, the company’s shares are down 1% year-to-date while the FTSE 100 is up 1% over the same time period.
However, after releasing a solid trading update this week, the company could prove to be a great investment over the medium to long term. Here’s why.
Debenhams Is Great Value
While the FTSE 100 currently trades on a price to earnings (P/E) ratio of 14.2, Debenhams continues to offer investors great value, with shares in the company currently on a P/E ratio of just 9.7, which highlights just how cheap its shares are. Furthermore, the current P/E takes into account the 27% fall in earnings per share (EPS) that has taken place over the last year, with Debenhams delivering a disappointing performance as a result of increased levels of competition and unsuccessful key-period strategies.
Of course, such a large fall in EPS may put many investors off buying into Debenhams. However, the company is forecast to return to growth next year, with EPS set to increase by around 5%, which is in-line with the market growth rate. Furthermore, Debenhams continues to offer a strong, well-covered dividend, with shares in the company currently yielding 4.7%.
Costa Coffee And Sports Direct
This week’s update from Debenhams stated that the company would be trialling concessions from Sports Direct (LSE: SPD) and Costa Coffee, which is owned by Whitbread (LSE: WTB). These concessions could turn out to be great moves for Debenhams, since both Whitbread and Sports Direct have been highly successful in previous years and could draw in a new customer base that hasn’t frequented Debenhams previously.
Furthermore, the move could be great news for Sports Direct and Whitbread, both of which are under pressure to maintain current strong growth rates. With both stocks trading on relatively high P/Es, it’s crucial that they deliver equally high growth rates in earnings. For instance, Sports Direct currently trades on a P/E of 19.4, while Whitbread’s P/E is 22.1.
Indeed, with Whitbread’s EPS forecast to grow by 11% this year, the deal could be particularly good news for the owner of Costa Coffee and Premier Inn, and could provide a boost to EPS, while Sports Direct could also add to its forecast 27% growth in EPS this year.
Looking Ahead
Certainly, Debenhams is enduring a challenging period at present. However, with the addition of Costa Coffee and Sports Direct, as well as a low P/E, strong yield and forecast return to growth next year, it could turn out to be a winning investment.