Broker snap: Debenhams on track to restore divi

KBC Peel Hunt has raised its profit forecasts for department store group Debenhams after a recent meeting with the retailer's management.

"With the prior-year comparatives hit by the significant shift in product from concession to own bought for autumn/winter 2009, we expect Debenhams sales trends to have improved in LFL [like for like] terms since the last interim management statement," writes KBC analyst John Stevenson.

Overall, KBC expects full-year LFL sales growth in the UK to be marginally below breakeven, with gross margin gains of more than a full percentage point driving full-year and second half profits forward.

The broker is sticking with its adjusted profit before tax (PBT) forecast of £143.6m for the current financial year, while 2011 estimated PBT is upgraded by £15m to £155.3m. It has made no further changes to 2011 estimates and its forecasts remain below market consensus. "Indeed, we forecast a LFL sales decline of -1%, vs market consensus of +1%, reflecting our view that retail sales will suffer due to lower levels of disposable income in 2011."

Despite the lower sales forecast, the broker thinks the group is well placed to deliver profit growth. "Own-brand success has been enjoyed across the board, with the launch of Mantaray womenswear and Principles by Ben de Lisi proving particularly successful," Stevenson notes.

"The recommencement of the refurbishment programme is progressing well, with the Manchester store completed and Glasgow nearing completion. We understand the customer response to Manchester has been so strong as to deliver accelerating sales during the process, rather than disruption," he added.

The broker rates the shares a "buy" and has a target price of 80p.

"Debenhams continues to deliver attractive cash generation and remains on track to reinstate the dividend" from the first half of the next financial year. KBC is predicting a yield of greater than 4% when the divi is restored, based on a payout that is covered three times by earnings.