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Debenhams - no longer on track to hit full year targets

Nicholas Hyett | 5 March 2019 | A A A
Debenhams - no longer on track to hit full year targets

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Although trading has improved slightly in the post-Christmas period, overall conditions remain challenging for Debenhams. Together with ongoing restructuring, this means the group no longer expects to meet market expectations for full year profits.

Further details will be given in its interim results, expected next month.

The shares fell 5.8% on the news.

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Our view

Times are tough for Debenhams.

Sales are falling despite the trusty blue-cross-sale stickers finding their way back onto shelves. Not only does that undermine efforts to shift the 'serial discounter' image, but it's squeezing the group's already wafer thin margins too.

Troubles up and down the high street show Debenhams' issues aren't all of its own making. Footfall is trending down as people shift to online purchases, and that only makes turning things round all the tougher.

Shutting underperforming stores has set Debenhams back £117.5m, and around 50 are earmarked for closure. The group is scrambling to save the pennies where it can - a new supply chain deal with a Hong Kong Specialist should help with cost savings. But that won't do much to ease worries about falling cash flows, and increasingly intimidating debts.

Perhaps the most concerning issue is the slowdown in online sales growth. Debenhams is already behind the curve, and while CEO Sergio Bucher knows a thing or two about online shopping, having been recruited from Amazon, he's also been booted off the board by two of Debenhams' largest shareholders. Uncertainty around Bucher's tenure is growing, and hopes for a stronger online business are also looking increasingly forlorn.

The extra £40m of credit recently secured may help keep the lights on for now, but more is needed in the longer-term.

Debenhams hasn't yet been forced to sell the family silver - namely the Danish Magasin du Nord business, but the dividend has gone and spending on store refits and maintenance is also getting wound back in.

It's not all about closures and cost savings though. Debenhams's wider strategy calls for a revamped store format and tacking restaurants and gyms onto existing stores to fill unused space. Sub-letting excess space is worth a go as a short term fix but we have our reservations. Browsing for cardigans and pumping iron don't really go hand-in-hand.

Ultimately the challenges facing the group are great, and look all the more acute in the current economic environment. Given that, it's perhaps no surprise that earnings forecasts have been tumbling, and the shares are among the most shorted on the stock market.

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Trading Statement

In the first half of the year, gross transaction value (GTV) and like-for-like (LFL) sales dropped 5.4% and 5.3% respectively. That reflects a slight improvement on the first 18 weeks of the financial year.

The UK, which accounts for the lion's share of revenues, underperformed the wider group, with like-for-likes down 6%, while the international business saw a 2.3% decrease.

Online sales across the period improved 2%.

Debenhams said it's on track to deliver £80m in annual cost savings going forwards. That includes the closure of around 50 stores and a sourcing partnership with Hong Kong based Li & Fung. The first new ranges from the partnership will be in store for the current season.

In addition to the £40m bridging facility secured earlier this year, the group is exploring options to restructure its balance sheet, in order to meet future funding needs.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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