Perennially struggling department store Debenhams (DEB) warns full year profit before tax could be towards the lower end of the forecast range ‘should current market volatility continue’.
The high street bellwether has seen a weaker clothing market in the second half of the year, May proving a particularly testing month, although CEO Sergio Bucher, seeking to turn Debenhams into ‘the destination for social shopping’, insists its beauty, accessories and food & drink lines have helped to mitigate the impact.
Click here to read today’s third quarter update from the heritage British brand, which shows like-for-like sales down 0.9% over the fifteen weeks to 17 June and triggers a 3.55% share price slump to a bombed-out 42.92p.
A quick glance at the share price chart demonstrates that most investors view this structurally-challenged, over-spaced retailer as a value trap.
DOWNBEAT OUTLOOK
Debenhams issues a pretty downbeat outlook statement, explaining that ‘the UK trading environment has been less predictable since Easter, with industry data confirming May was tough for the retail industry.’
Full year gross margin guidance is left unchanged, with a 25 basis point decline on the cards. By bearing down on costs, Debenhams ‘currently anticipates that full year 2017 profit before tax will be within the range of market expectations, but should current market volatility continue, profit before tax could be towards the lower end of the current range.'
Ahead of today, the consensus pre-tax profit estimate stood at £99.8m, although Cantor Fitzgerald Europe expects that estimate to reduce by around 3% to £97m.
REDESIGNING DEBENHAMS
Bucher highlights further improvement in full price sales and healthy, albeit slowing, growth in digital sales. The former Amazon executive also insists Debenhams is making progress with its new strategy, ‘Debenhams Redesigned’, launched alongside the half year results in April. This is a plan to drive growth and efficiency within the business.
He sees a particular opportunity to turn Debenhams into a destination for ‘social shopping’ - shopping as a fun leisure activity shared via social media - through greater use of mobile as well as enhanced experiential beauty and food and beverage offerings.
Given the subsequent share price performance since April, investors are largely unconvinced by the recovery strategy.
As Shares outlined here, Debenhams faces any number of headwinds, among them slowing UK consumer credit growth, margin pressure from weak sterling as well as long store leases which restrict its ability to adapt to declining footfall and the channel shift online.
Indeed, as Russ Mould, investment director at AJ Bell, explains: ‘In 2015-16 the company’s lease expenses on these properties came to £221m and future payments on existing leases (described in the 2016 annual report and accounts as “non-cancellable”) are estimated to be £4.6bn, based on current terms and conditions.
'This is a considerable burden on the company and one that investors must take into account as they ponder whether Debenhams’ shares are now looking very cheap or are nothing more than a classic value trap.'
