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Debenhams to refocus strategy after profits dive Debenhams cautious about UK recovery as profits dive 25%
(about 3 hours later)
Debenhams is to refocus its promotional strategy after a disastrous Christmas trading performance led to a sharp fall in half-year profits. Debenhams has warned shoppers are not turning the positive data about the UK economic recovery into extra spending as it reported a 25% decline in profits.
The department store chain, which has 158 outlets in the UK, will also look to speed up delivery times in its online operation and said it is in discussions to introduce a number of "well-known" brands into its shops. “Talking to our customers it is clear that they are very aware of all the positive economic indicators in the press and on TV,” said chief executive Michael Sharp.
The moves, outlined by chief executive Michael Sharp, follow a "challenging" period in which profits fell 24.5% to £85.2 million in the 26 weeks to March 1. “They see all that and inflation starting to come off. They understand it but none of that is translating into how they manage their weekly or monthly budgets. We are very cautious about the strength of the UK consumer recovery over the rest of the financial year.”
Debenhams alerted the City to the slide in profits on New Year's Eve after weak trading in September and October and poor sales in clothing was compounded by a difficult festive period as rivals engaged in a price war. His comments came as inflation fell for the sixth successive month with the Consumer Prices Index dropping to 1.6% in March. This could see wages actually start to outstrip inflation for the first time in six years later this week.
The company said today: "Promotions are a traditional strength of Debenhams but in the run-up to Christmas their impact was diluted by the highly promotional trading environment in the UK. Debenhams issued a profits warning on New Year’s Eve followed rapidly by the departure of its finance director Simon Herrick who, it emerged, had written “Santa” letters to suppliers asking for extra price discounts.
"We are therefore refocusing our promotional strategy which will see more clearly defined promotional periods in the trading calendar with fewer days on promotion." Sharp said the 240-strong chain had seen lower than expected clothes sales against “overambitious” targets, deeper discounting and the fact that it lagged behind rivals in online selling.
Debenhams said it also trailed behind its rivals in terms of convenience because it lacked a competitive range of premium delivery options. Sales rose 2.1% in the 26 weeks to March 1 with the UK up just 1% and overseas up 7%. Pre-tax profits fell 25% to £85.2 million, which was bang on what it warned at the end of December. The dividend has been held at 1p a share.
It has pledged to improve in this area in time for Christmas, with next-day click and collect and a 10pm cut-off for next-day delivery. This has required a step-up in spending on automation in its distribution centres. Debenhams will push on with improving its online delivery, Click & Collect, and within 12 months ensure it has a cafe or restaurant in every store, which Sharp said encouraged customers to stay longer and spend more. The group is  looking at bringing in outside chains, such as coffee shops, to do this.
The company, which opened new stores at Leamington Spa and Haverfordwest in October last year, said analysis of all of its shops found that 10% of its UK store space was currently under-performing. He also said the group was still talking to Mike Ashley’s Sports Direct, which has an option to buy a 6.6% stake in Debenhams. Sharp said: “Our customers buy sportswear and we only have a small sports business so we are talking about any potential opportunities with Sports Direct.”
It said: "We continue to work on a number of routes to improve sales densities. These include adding more choice of products, brands and services. Menwhile House of Fraser, in which Sports Direct has grabbed an 11.1% stake at the same time that China’s Nanjing Cenbest has taken control, revealed far stronger trading. Its sales rose 3.6% to £1.3 billion in the year to January 25 with headline earnings up 8.3% to £60.2 million.
"We are currently in discussions with a number of well-known brands, some of which are expected to be trialled over the next six months."