Last year we stuck by high street chain Debenhams (DEB), despite a protracted decline in the share price. The maintenance of the dividend – a roughly 7 per cent dividend yield – was enough to keep us keen. The question is, following a disappointing festive trading period and a 35 per cent profit downgrade, could the shares' income status be under threat?
Over Christmas, group like-for-like sales fell 1.3 per cent although online sales still grew by nearly 10 per cent. The weeks either side of Christmas fared the worst, forcing the chain into heavier discounting, thus leading to a significant squeeze in gross margins. As such, this year's pre-tax profit is likely to be in the range of £55m to £65m – a substantial downgrade compared with previous estimates.
Challenges are likely to persist in the short term, particularly given the imminent introduction of IFRS16, which will force Debenhams’ to shed light on its 250 lease arrangements. While management doesn’t expect the accounting change to affect its underlying cash-flow performance, it expects a “material impact” to both the balance sheet and profit-and-loss account.
