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Debenhams buoyed by strong Christmas and improved margins

The retailer's self-help initiatives are paying off but questions remain over who might succeed chief executive Michael Sharp
April 14, 2016

A strong set of half-year results from department store Debenhams (DEB) reflect the retailer's better than expected Christmas, sending the share price up more than 3 per cent on the day of their release. But these should be the last set of numbers from current chief executive Michael Sharp, who will leave the group later this year. Mr Sharp first declared his intention to step down last year amid murmurs of shareholder unrest, but a successor has yet to be announced.

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Like-for-like sales rose 2.4 per cent on a constant-currency basis during the first half, mainly driven by the shift in customer behaviour to online shopping. Online sales grew by 10 per cent during the same period, and now represent more than 15 per cent of the group's gross transaction value. In the first half, the gross transaction value nudged up 1.6 per cent to £1.63bn.

Further efforts were made to keep stock levels at a controllable rate and reduce the scale of promotional activity. That resulted in fewer markdown sales, equating to a 90 basis point improvement in the gross margin. Overall, the gross margin rate improved by 20 basis points due to a shift in the UK sales mix. With operating costs only moving up fractionally, operating profit was able to squeak out a 0.2 per cent improvement to £99.6m. Costs are expected to accelerate in the second half, however, following the introduction of the National Living Wage in April, which management believes will cost Debenhams an extra £3m this financial year, and £8m in FY2017.

So far, Mr Sharp says the board is "satisfied with the progress to date" but admits "there is plenty more to do". The group says it expects to deliver full-year results in line with expectations, although the question of Mr Sharp's successor looms large. Recent speculation has named current Mothercare (MTC) chief executive Mark Newton-Jones as a possible contender.

Analysts at Peel Hunt expect pre-tax profit of £120m for the year ending August 2016, giving EPS of 7.8p, compared with £114m and 7.6p in FY2015.

DEBENHAMS (DEB)
ORD PRICE:80pMARKET VALUE:£982m
TOUCH:79.95-80.1p12-MONTH HIGH:96pLOW: 64p
DIVIDEND YIELD:4.3%PE RATIO:10
NET ASSET VALUE:77p*NET DEBT:24%

Half-year to 27 FebTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151.3388.95.91.00
20161.3393.86.21.03
% change-+6+5+2

Ex-div: 2 Jun

Payment: 1 Jul

*Includes intangible assets of £941m, or 77p a share