Join our community of smart investors

Profit slump at Debenhams

RESULTS: Department store Debenhams has had a terrible first half, but management has plans to turn around the struggling retailer
April 15, 2014

Debenhams' (DEB) chief executive Michael Sharp admitted that the first half had been "challenging" for the department store. So he outlined a new strategy for the struggling retailer following a profit warning in December and a sharp slide in pre-tax profit during the first six months of the year.

IC TIP: Hold at 81pp

Mr Sharp explained that the poor half-year performance had reflected three issues: a weak clothing market in the autumn and over-ambitious sales targets, an intense promotional environment and, finally, he reckons the department store had lost out to retailers with more advanced multi-channel models - an important driver over the Christmas period. This led to lower-than-expected Christmas sales in the UK, requiring higher markdowns to clear stock - resulting in a 100 basis point fall in the group gross margin and a material slump in profit. In the UK alone, sales rose 0.4 per cent to £1.08bn, but margin pressure sent the operating profit down 28 per cent to £70.5m.

Meanwhile, like-for-like group sales growth of 1.5 per cent was principally due to a 24 per cent rise in online revenue. International sales did rise 9 per cent to £224m, with a strong performance from Magasin du Nord, but this was offset by weakness in Ireland, leaving divisional operating profit just 0.9 per cent higher at £22.9m.

To tackle these problems, management is pushing through a number of changes. The first is a more competitive online offering, with more delivery options introduced by Christmas - such as next-day click and collect, alongside an improved checkout and returns system. Promotional periods will be more defined, with fewer bigger sales and store space will be worked harder. Mr Sharp added that Debenhams was in talks with a "number of well-known retail brands", including Sports Direct, with whom there were "potential opportunities" to arrange a sports offering in the department stores.

Peel Hunt expects adjusted pre-tax profit of £113m for the full year, giving EPS of 7.3p (from £143m/9.3p in 2013).

DEBENHAMS (DEB)
ORD PRICE:81pMARKET VALUE:£993m
TOUCH:80-81p12-MONTH HIGH:114pLOW: 71p
DIVIDEND YIELD:4.2%PE RATIO:11
NET ASSET VALUE:62p*NET DEBT:49%

Half-year to 1 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20131.281137.11
20141.30855.61
% change+2-25-21-

Ex-div: 4 Jun

Payment: 4 Jul

*Includes intangible assets of £883m, or 72p a share