Debenhams volatile as bulls and bears swap blows

A profits downgrade, rising debt and a dividend cut have done little to help the fragile mood surrounding department store chain Debenhams.

Expectations were already low, but today's 52% drop in half-year underlying profits to £42.2 million turned out to be even bigger than most forecasts. Extreme weather and a poor Christmas were largely to blame as like-for-like sales fell 2.2% in the 26 weeks to March 3.

This means full-year profits will now be closer to £50 million than the top end of £61 million previously seen in City forecasts. In line with the retailer's aim for 2x earnings cover, the interim dividend is being rebased to 0.50p per share against just over 1p previously.

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With finance director Matt Smith also announcing plans to join Selfridges, shares sunk to 20.37p briefly this morning - a two-week low - before recovering into positive territory and a four-week high! However, the former FTSE 250 Index stock is still stuck at recession-era levels, a period when it was blighted by debts from former private equity owners.

Chief executive Sergio Bucher says he is pleased with his Debenhams Redesigned turnaround, but analysts are still to be convinced given the structural pressures on department stores. Cantor Fitzgerald holds a target price of 27.5p, compared with 25p at RBC Capital Markets and just 18p at UBS.

Source: interactive investor             Past performance is not a guide to future performance

Digital retailers such as Amazon and the slick online offerings provided by the likes of Next have eroded the market position of Debenhams at a time when many other established retail names are struggling.

Some comfort may come from the fact that Britons have just had their first real-terms pay rise for many months, with official figures showing wages growing faster than inflation for the first time since January 2017.

Bucher's plans, which were unveiled last April, involve positioning the chain as a destination for "Social Shopping", with smartphone interaction with customers at the heart of the strategy.

The CEO said he does not expect any help from the external environment, with the chain turning to self-help measures to offset difficult trading conditions.

He added today: "We are moving faster and working harder than ever to ensure Debenhams is well-placed to outperform in this new retail world."

Source: interactive investor         Past performance is not a guide to future performance

Among his list of priorities for 2018/19 are achieving above-market digital sales growth and holding on to top spot in beauty products. He is also looking to deliver a revitalised fashion product through Designers@Debenhams.

Debenhams remains cash generative, although in terms of the dividend the company says its first priority is to invest in its turnaround strategy. Its medium‐term target is to reduce net debt, but this crept up 14% to £248 million today and is on track to stand at between £300 million and £320 million for the full year. It has committed financing facilities worth £520 million.

In terms of the read across to other retailers, RBC Capital Markets saw today's update as a small negative for other clothing retailers.

Analyst Richard Chamberlain said: "In particular Debenhams has guided to higher exceptional costs, which we think will be seen as a negative read for Marks & Spencer.

"However, given current trading should now improve we think this may create a buying opportunity for UK apparel stocks."