Discounting blow as Debenhams reports drop in profits

Debenhams, the UK’s second- largest department-store chain, became the first victim of increased holiday discounting by Britain’s retailers as it said profit will drop in the first half of the financial year.

An anticipated surge of Christmas business failed to materialise and has left Debenhams with a backlog of inventory to clear in the next two months, the company said yesterday, sending the shares down as much as 15%.

Debenhams joined other UK stores by offering discounts of as much as 50% before Christmas as shoppers delayed purchases to wait for bargains. That’s taken its toll on profitability, with first-half pretax profit expected to be about £85m (€102m), down from almost £115m a year earlier, the retailer said yesterday.

“This is not Debenhams-specific and it’s unlikely to be the only profit warning we’ll see over the next few weeks,” said Bryan Roberts, an analyst at Kantar Retail in London. “Wandering down the high street, you see so much excess stock that will need to be discounted even further.”

Debenhams’ shares fell by roughly 11% in trading yesterday.

The drop was mirrored by competitors. Marks & Spencer, which also offered discounts prior to the holiday, fell as much as 2.8% ahead of a Jan 9 sales update. Next, which refrained from discounting until after Christmas, slipped 0.6%. The owner of the Next Directory home-shopping business is due to report Jan 3.

Debenhams said same-store sales rose 0.1% in the 17 weeks ended Dec 28, citing dwindling shopper numbers, pressure on household incomes and unseasonal weather. Gross margin for the first half will narrow by 80 to 100 basis points because of the discounting needed to shift inventory.

“As has been widely commented on in the media, the market was highly promotional in the run-up to Christmas and we responded to these conditions to ensure our offer was competitive,” chief executive officer Michael Sharp said. “However, this extremely difficult environment has inevitably had an impact on both our sales and profitability.”

Given current business conditions, Debenhams said it has decided to cease its share buyback programme. Both sales and profit margins were weaker than expected, Citigroup analyst Richard Edwards said in a note. Estimates for full-year pretax profit will need to be reduced by at least 20%, the brokerage said.

Debenhams has company-specific difficulties that include a shift into lower-margin product categories, a promotional approach to business, and a heavy reliance on own-brand product, according to Andrew Wade, an analyst at Numis Securities.

Attention will now turn to next week’s update from Marks & Spencer, according to Clive Black, an analyst at Shore Capital in Liverpool, England.

Bloomberg