In recent years, Debenhams (LSE: DEB) has struggled to come to terms with a changing UK consumer landscape. With household budgets having come under sustained pressure from wage growth thathas consistently fallen behind inflation, consumers have become increasingly price conscious and have traded down to lower-priced options. As such, mid-tier operators such as Debenhams have seen their sales and profitability come under pressure.
In response, Debenhams offered greater discounts and while this aided sales growth, it came at the expense of margins. As a result, its bottom line declined and this hurt investor sentiment.
Now though, Debenhams has a new strategy focused on margins and its having a positive impact on the companys bottom line. Last year Debenhams posted a rise in net profit of 3%, while further positive growth is forecast for this year and next. With the shares trading on a price-to-earnings (P/E) ratio of just 10.4, theres significant upward rerating potential on the cards. And increasing household budgets (in real terms) are likely to provide Debenhams with a tailwind moving forward.
Potential in the pipeline
Also offering stunning turnaround prospects is pharmaceuticals company AstraZeneca (LSE: AZN). Like Debenhams, it has endured a difficult period, with the companys pipeline of new drugs failing to fully offset the loss of patents on key blockbuster drugs. Due to this, AstraZenecas bottom line has posted a sustained fall in recent years, with this trend likely to continue in the near term.
However, after multiple major acquisitions, AstraZenecas drug pipeline now offers huge long-term appeal. Evidence of this can be seen in the bid rumours for the company thathave persisted in the last couple of years. Although a bid would equate to a high short-term gain in the companys share price, AstraZenecas drug pipeline has the potential to deliver even higher returns in the long run. And with its shares trading on a P/E ratio of 14.9, they seem to offer good value for money given their turnaround potential.
Big change ahead
Meanwhile, Imagination Technologies (LSE: IMG) is another company with huge turnaround potential. Clearly, it remains a relatively high-risk play asits now expected to post a loss for the current financial year. Furthermore, there are major changes ongoing at the company following its profit warning and they equate to great uncertainty regarding Imagination Technologies future prospects.
Notably, the company is searching for a new CEO and he/she is likely to bring a revised strategy thatcould impact on investor sentiment in the short run. And with it being in the process of a major restructuring thatincludes asset disposals, Imagination Technologies could be a very different company with a vastly changed business model in a year or twos time.
But with a return to profit forecast for next year and a price-to-earnings growth (PEG) ratio of 0.8, it may be worth buying for less risk-averse investors.
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