An earlier than expected Christmas trading update saw the shares fall 19.9%.
The group says conditions remain challenging, and a difficult Christmas period means this year's profit before tax is now likely to be in the range of £55m to £65m. Prior to the news, analysts had expected a figure of more like £83m.
'In the bleak midwinter' was probably an apt soundtrack to the Debenhams Christmas party. It's been a lean Christmas, and momentum going into the New Year was even worse. If that wasn't bad enough, the news came just a day after rival Next released a more positive update, making this profit warning all the more galling for investors.
Struggling in store sales, even with extra discounts, is clearly not ideal. Resorting to getting the sales tags out early to support volumes goes against ongoing efforts to shift its 'serial discounter' reputation.
To be fair, not all of the difficulties are of its own making. Sales volumes have been weak nationally this year as inflation outstrips wage growth. However, it can't be ignored that too many shops look tired and cluttered.
Sorting things out is a tough task. Simply closing excess sales space is the most obvious solution. But given many of its stores are on long leases, shutting more than a handful would be costly. Giving the stores a refresh and tacking on features like restaurants and gyms is probably the best option of a bad bunch, so we can understand why this is the chosen path. Nonetheless, we have reservations. Browsing for cardigans and pumping iron don't really go hand-in-hand.
Impressive growth in online sales provides some positivity. Around £1 of revenue in every £6 now comes from online purchases, and we'd expect the new CEO to know a thing or two about growing this part of the business. After all, Sergio Bucher was recruited from a senior position at Amazon's European business.
However the challenges facing the group are great, and look all the more acute in the current environment. Before the price fall, the shares traded at 6.5 times expected earnings, making them the lowest-rated of the retailers we cover.
Debenhams' solid cash generation has previously warded off too much talk of a dividend cut, but the prospective yield was 8.3% even before the news broke. That does not suggest the market is confident about its future prospects.
Christmas Trading Details
Debenhams says the early weeks of the quarter were disappointing, and it increased promotional activity in the 6 weeks up to Christmas. While sales were initially stronger, the first week of the post-Christmas sale was below expectations despite further discounting.
The gross value of Debenhams sales over the 17 weeks to 30 December declined 0.8%. At constant currency, like-for-like sales fell 1.8%, driven by a 2.6% decline in the UK. Within this, the Gift division was particularly weak. International LFL sales rose 2.1%, with digital sales up 9.9% as smartphone transaction numbers continue to rise, up 36% year-on-year.
As a result of the increased markdowns, first half gross margins are now expected to be around 1.5 percentage points lower than the prior year.
The group has been working on a new, more flexible operating model. This, plus a review of central costs, means Debenhams now expects to generate further annualised savings of £20m. With half of these set to be achieved in the second half of this year, costs are now expected to rise by 1% in the year to August 31, compared with previous guidance of 1-2%.
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