Debenhams have this morning released a trading update, with figures provided for the 15 and 41 weeks to 11 June 2016. After reporting a worsening of trading conditions, the shares were down this morning by over 5%.
For the 15 weeks to 11 June, the group reports gross transaction value up 0.5%, with like for like sales (LFL) down 0.2% (1.6% at constant currency rates). These numbers represent falling trends in relation to the figures for the 41 week period.
Health and Beauty sales have shown good growth, however Debenhams describe current trading conditions as tough, especially in clothing. The group have reacted to this by looking to clear seasonal stock through increased promotional activity, particularly in womenswear. Consequently, the group's previous gross margin guidance for an improvement of up to 50bp is be revised downwards. No progress is now expected.
As a result of the promotional activity, terminal stock levels are set to be at historic lows, in line with the group's plans. Costs are also being controlled well, and are expected to increase by the bottom end of their guidance of 2%-4%. Debenhams believe that this should mean that profits before tax will still fall within their previous guidance, as will the group's level of debt.
Online sales grew by 7% in the 15 week period, against strong comparatives. Over half of all online orders are now from mobile devices. Debenhams expect to open another 30 casual dining spots across their stores by the Autumn. This should mean around 40% of stores will have a food offer by Christmas.
After more positive trading updates earlier this year, Debenhams have followed in the footsteps of larger rivals Next and Marks & Spencer's and fallen foul of the tough conditions in the UK's clothing retail sector.
Debenhams has looked to move away from the famous 'Blue Cross' discount model, in the hope of boosting profit margins. However, getting shoppers to spend on the high street is difficult enough just now, and Debenhams have found it even harder when their customers are not getting the discounts they are used to. Consequently, Debenhams have been forced to get the Blue Cross stickers out again. Despite their best intentions, it looks like the group has not yet shed its reputation as a serial discounter.
The group has other challenges too, not least optimising the space within their large store estate. Although debt is falling, overall levels are still above targets , and the group has significant leasehold obligations. Debenhams is, therefore, one of the lowest-rated retailers that we cover. At c.9.3x forward earnings, the stock trades at a near 33% discount to the sector. The current Bloomberg consensus is for a yield of c4.7% next year.
However, in recent times outgoing CEO Michael Sharp has made some useful strategic calls, in particular to hold lower levels of seasonal stock, and to invest in a multi-channel retail strategy. Progress in online and mobile has been strong, and these now represent 15% of total revenue. With Sergio Bucher of Amazon's European fashion team taking over, the focus on digital and online looks set to continue, but analysts will need to wait until later in the year to hear his plans in full.
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