Business

Debenhams shares plunge after third profit warning this year

Debenhams has issued a fresh profit warning on the back of market weakness and competitor discounting

DEBENHAMS shares plunged after the retailer issued its third profit warning for 2018, saying market weakness and competitor discounting had hit sales.

The department store chain suffered 1.7 per cent drop in like-for-like sales over the 15 weeks to June 16, and said trading was "below plan" in May and early June despite weak comparatives from a year earlier.

The disappointing performance has forced the retailer to "reassess" expectations, with full-year pre-tax profits now set to come in between £35 million and £40 million, down from previous estimates of £50.3 million.

It marks Debenhams' third profit warning for the year, having first slashed forecasts in January on the back of painful price cuts.

Another update in April noted earnings would be at the lower end of forecasts after the retailer was gouged by extreme weather brought in by the Beast from the East.

The latest warning - sparked by "increased competitor discounting and weakness in key markets" - sent shares down more than 16 per cent in early trading on Tuesday.

Fellow retailers also took a hit, sending the likes of Next down 1.4 per cent, Burberry down 2.1 per cent and Marks and Spencer Group down 1.1 per cent

Debenhams said further cost cuts are now on the cards, with a ramped-up efficiency drive set to focus on "self-help and prioritising cash generation".

"We also intend to conduct a strategic review of non-core assets, aiming to focus investment behind our strategy," it added.

Debenhams executives said they are considering the sale of its Magasin du Nord subsidiary in Denmark, where it currently has six stores.

It will also look at disposing of a small in-house printing operation called Magenta, which prints materials for Debenhams and third parties and has an annual turnover of less than £10 million.

The company stopped short of announcing store closures but, as previously announced, it is still assessing whether to shutter 10 of its outlets over the next five years, a spokeswoman said.

The footprint of up to 30 of its stores may also be reduced, while the leases of 25 locations may be renegotiated as they come up for renewal over the next five years.

The spokeswoman said no job cuts are currently planned.

Capital expenditure, however, will suffer a "material reduction" in 2019.

Chief executive Sergio Bucher said: "It is well documented that these are exceptionally difficult times in UK retail and our trading performance in this quarter reflects that.

"We don't see these conditions changing in the near future and, because it is our priority to maintain a robust balance sheet, we are making very careful choices about how we deploy capital."

However, the retail boss said he was seeing "clear evidence of progress" in online sales - which rose 16 per cent over the 15 weeks to June 16 - while customers were responding "positively" to product improvements.

"We have also put in place a leaner operational structure and made a number of important hires so that we are well-equipped to navigate the market turbulence."

Nicholas Hyett, an equity analyst at Hargreaves Lansdown, said the disappointing results "will be all too familiar to long-suffering Debenhams shareholders".

He added: "Unfortunately it all feels like Debenhams is playing catch-up with an industry that's left it behind.

"Debenhams reckoned it was heading for something like £750 million in annualised digital sales at the half-year, compared to total sales of £2.3 billion in 2017.

"There's some way to go before good digital growth offsets the stresses elsewhere.

"Financial constraints are now starting to restrict Debenhams' freedom of movement - with capex for next year being cut to protect the balance sheet.

"Mr Bucher's going to have his work cut out turning this ship round."

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