Debenhams cuts promotions

A dire profit warning last New Year's eve prompted department store Debenhams (DEB) to reveal a new strategy in April to rebuild the business, centred on increasing the proportion of full-priced sales, improving the online offer and streamlining sourcing and logistics. A third-quarter trading update suggests this approach may well be working - although the numbers haven't been good enough to impress the markets.

Management provided sales figures for the 14 weeks to 7 June and 15 weeks to 14 June to account for a two-week delay in this year's summer sale. Revenue rose 0.7 per cent and fell 1 per cent, respectively. Online sales were 10 per cent higher (for the 14 weeks) - a material slowdown on previous quarters - while sales at overseas business Magasin du Nord grew 10 per cent (for the 15 weeks). The gross-margin guidance for the full year was left unchanged, which suggests management is having reasonable success in achieving lower markdowns.

However, there were two more interesting pieces of news. First, Debenhams is to refinance its debt through a £200m seven-year bond issue. This will increase next year's interest costs by £4m, which management believes it can offset through higher full-price sales and cost control. Analysts have, nonetheless, factored the change into their 2014-15 forecasts by downgrading profit expectations. Second, Debenhams will be trialling new concessions this year, including Sports Direct and Costa coffee.

John Stevenson at Peel Hunt says...

Hold. A year or so ago, Debenhams invested heavily to position the business as a leading multi-channel retailer. It made progress, but there's still a lot to do. Last Christmas disappointed, much of which was down to poor online fulfilment and early discounting. The question now is whether Debenhams can rebuild its proposition in time for this Christmas. That will involve better online fulfilment, more efficient stock management, and - crucially - weaning customers off the constant discounting they have come to expect. Because of the company's history of profit warnings, the market won't give it the benefit of the doubt. But overall it is making the right changes, and the balance sheet is healthy.

Kate Calvert at Investec says...

Sell. It's not an expensive stock, but the amount of investment needed to bring the company up to scratch means I can't see much profit growth over the next couple of years. Debenhams uses promotions to attract shoppers, and that has devalued the business. It must now improve the quality of its products, which costs money, while cutting promotions, which takes time. The online business is highly inefficient and lacks leading service standards. The refinancing package is nothing unusual, but will lead to higher costs in the short term, which effectively amounts to another downgrade. Expect EPS of 7.1p this financial year.