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Debenhams shares dive as poor Christmas prompts profit warning Debenhams shares dive as poor Christmas prompts profit warning
(about 11 hours later)
Shares in Debenhams dived 11%, knocking £110m off the value of the department store group, as it warned that first-half profits had been hit by "an unprecedented level of promotional activity," in the runup to Christmas. Shares in Debenhams dived more than 12% , knocking £125m off the value of the department store group, after it warned that first-half profits had been hit by unprecedented high street discounting in the runup to Christmas.
The retailer said it expected to make a pre-tax profit of £85m in the first six months of its financial year, 26% less than last year, as a hoped-for late surge in sales in the week before 28 December failed to materialise. Its shares were also hit as the company said the disappointment on profits meant it would be halting its share buyback programme. In its second profits warning in less than a year, the department store group said it expected to make a pre-tax profit of £85m in the first six months of its financial year, 26% less than last year, after hopes were dashed for a late surge in sales in the week before 28 December.
Analysts now expect Debenhams' profits to come in some 20% below forecasts, which had already been cut ahead of Christmas when it became clear that trading was not going well. House broker Oriel, for example, cut its expectations for the full year by 13% to £135m on 18 December but the company is now expected to make just £115m for that period. Analysts now expect Debenhams' profits to come in around 20% below forecasts, which had already been cut before Christmas when it emerged that trading was not going well. Its house broker, Oriel, reduced its expectations for the full year by 13% to £135m on 18 December but the company is now expected to make just £115m for that period.
Michael Sharp, the chief executive, said: "The market was highly promotional in the runup to Christmas and we responded to these conditions to ensure our offer was competitive. However, this extremely difficult environment has inevitably had an impact on both our sales and profitability. Michael Sharp, the chief executive, said: "The market was highly promotional in the runup to Christmas and we responded to these conditions to ensure our offer was competitive. However, this extremely difficult environment has inevitably had an impact on both our sales and profitability."
"Looking forward, I expect conditions to remain highly competitive as we enter 2014." Sharp was also gloomy about the outlook for 2014. "I think there is nothing on the horizon to give us any confidence that consumer sentiment is going to improve. When you talk to customers clearly they have less disposable income. Although they can see positive news about the economy, the reality is it doesn't feel any better," he said.
Debenhams' second profits warning in less than a year is the first concrete sign of a tough festive season for clothing retailers who have been hit by a combination of relatively mild weather, pressure on household incomes and competition from this year's expensive must-have electronic gadgets such as tablet computers and gaming consoles. The company also said the disappointment on profits meant it would be halting its share buyback programme, after buying about £40m of shares last year.
Shares in rivals Marks & Spencer, Sainsbury's and Next were hit by worries that Debenhams was not the only clothing retailer to suffer. M&S was the biggest faller in the FTSE 100, down 2.5% to 432p. Debenhams' profits warning is the first concrete sign of a tough festive season for clothing retailers which have been hit by a combination of relatively mild weather, pressure on household incomes and competition from this year's expensive must-have electronic gadgets such as tablet computers and gaming consoles.
"The mid-market struggled, that was pretty obvious from the discounting in the high street pre-Christmas and not all of it looked pre-planned," said Kate Calvert, an analyst at Investec. "There will be a slight miss on sales but the bigger hit will be on gross margins." Shares in rivals Marks & Spencer, Sainsbury's and Next were hit by worries that Debenhams was not the only clothing retailer to suffer.
The latest problems at Debenhams will pile pressure on its finance director, Simon Herrick, who was already seen as likely to exit the company after a series of nasty surprises for investors on profits. M&S was the biggest faller in the FTSE 100 on Tuesday, down 2.3% to 432p on fears that its profit margins had also taken a hit from a week of discounting on its top selling knitwear and other clothing in the runup to Christmas. There were also signs that M&S had lost some of its share of the women's clothing market in the 24 weeks to 13 November compared with the same period a year before, according to market analysts Kantar. In contrast, Next, Primark and New Look all gained share in the year according to the data, as did Debenhams.
Debenhams blamed its troubles on issues affecting the whole retail sector rather than its own mistakes. "As widely documented, the retail sector as a whole has been highly competitive with an unprecedented level of promotional activity. This is largely due to declining high street footfall, as evidenced by the BRC/Springboard Footfall Monitor, continued pressure on household incomes and the impact of unseasonal weather on clothing and clothing-related sales," the retailer said in a statement. However, Debenhams' profit warning showed it paid a heavy price for keeping sales moving. Next, which will report on its Christmas trading performance on Friday, held off from offering any discounts until Boxing Day.
It said group underlying sales rose by just 0.1% in the 17 weeks to 28 December, despite a 27% rise in sales online. The figure suggests sales in stores open more than a year fell back. But the biggest hit to profits came from a higher level of discounting as the retailer struggled to attract shoppers – cutting gross profit margins by up to 1%. "The mid-market struggled, that was pretty obvious from the discounting in the high street pre-Christmas and not all of it looked pre-planned," said Kate Calvert, an analyst at Investec.
"There will be a slight miss on sales but the bigger hit will be on gross margins."
At Debenhams, underlying sales rose by 0.1% in the 17 weeks to 28 December, despite a 27% rise in sales online. The figure suggests sales in stores open more than a year fell back. But the biggest obstacle to profits came from a higher level of discounting as the retailer struggled to attract shoppers – cutting gross profit margins by up to 1%.
The latest problems at Debenhams will pile pressure on its finance director, Simon Herrick, who was already seen as likely to exit the company after a series of nasty surprises for investors on profits. He was also the author of a widely criticised letter to suppliers in which he demanded a discount days before Christmas.
Sharp would not comment on Herrick. Asked if he was under pressure himself, Sharp said: "What we've witnessed here is a tough trading season, not a challenge to our credibility or strategy."
Sharp blamed Debenhams' troubles on issues affecting the entire high street rather than its own mistakes.
"The high street stores were a sea of red before Christmas and clothing has been the problem because of unseasonal weather," he said, adding that shops clearly had lots of coats and knitwear to clear after Christmas.
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