Shares in Debenhams (DEB) jumped 4.4% to 94.75p on investor relief the retailer has avoided another profits warning. Nevertheless, the department store operator's latest trading update showed weaker-than-expected sales, with woeful British weather continuing to take its toll.
Over the 16 weeks to 22 June, the £1.2 billion cap delivered flat like-for-like sales, below market expectations of a 1.5% increase in sales. Besides fragile consumer confidence, Debenhams sales were hit by cold, wet and windy spring weather throughout March and April which put the dampeners on demand for its new season ranges.
In an increasingly-promotional market, the retailer has irked investors with two profit warnings this calendar year. The first came not long after Christmas (8 Jan), when Debenhams flagged margin disappointment to the market, followed by a second (4 Mar) earnings alert triggered by heavy January snowfall and margin-crimping promotions required to shift stock in February.
Debenhams delivered like-for-like sales up 3.1% for the first half to 2 March, yet the recent sales softness means cumulative trading for the 42 weeks to 22 June now shows like-for-like sales growth constrained to 2.1%.
Chief executive officer Michael Sharp today highlighted a focus on stocks, margins and costs. Given a better-than-expected performance on cost savings, combined with unchanged gross margin guidance at flat for the full year, Debenhams remains 'comfortable' with the year's downgraded taxable profits range of £150 million-to-£158 million.
Sharp insists the British brand is securing ongoing market share gains in clothing, beauty and home product categories. Furthermore the tenth biggest UK online retailer by traffic volume has enjoyed 40% growth in online sales for the second half to date. In the financial year thus far, web-based revenues are up almost 44% and account for more than 13% of total sales, with mobile being the fastest growing sales channel.
While UK sales are struggling, Sharp was able to report a strong result from Magasin du Nord, Debenhams' department store chain in Denmark, where same-store sales skipped 4.6% higher, as well as a pleasing performance from international franchise stores.
Analysts appear fairly positive on the stock, despite recent disappointments. Broker N+1 Singer, sticking with its 'buy' rating and 110p price target, says : 'The market understandably harbours some doubts about its ability to deliver future profit growth in light of the recent disappointments but there are numerous strategic initiatives underway and today's update highlights good share gains in almost all areas.'
Espirito Santo's Sanjay Vidyarthi has a 'buy' rating and 95p 'fair value' estimate. He concedes: 'This is not a high quality update, but we think that the market had been expecting another warning, so there may be some relief today.' Furthermore, the analyst points out the shares are among the lowest rated in the sector, although 'the investment case for Debenhams had been posited on a sales driven earnings recovery, so the trend does need to improve before the investment case becomes compelling again.'
