Debenhams issues profit warning as it battles increased discounting from rivals

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(qlmbusinessnews.com via theguardian.com – – Tue, 19 June, 2018) London, Uk – –

Retailer seeks to reduce costs as chief executive warns of ‘exceptionally difficult times’

Department stores group Debenhams has issued its third profits warning this year, with its chief executive, Sergio Bucher, saying he sees no improvement in the “exceptionally difficult times” on the UK high street.

The company first warned on profits in January, after a disappointing Christmas, and says trading in May and early June also fell short of expectations. The group has been hit by the general weakness in the retail market and increased discounting from rivals.

The latest blow to high street retailers comes after department store rival House of Fraser announced it was shutting more than half its UK branches, including its flagship store on London’s Oxford Street, putting 11,000 jobs at risk. It is one of a string of retailers that are using a company voluntary arrangement, a form of insolvency, to close outlets.

Others, such as Toys R Us and Maplin, have collapsed into administration in recent months, hurt by weak consumer spending and a shift towards online shopping.

Bucher said Debenhams was seeking to negotiate rent reductions with landlords on 25 stores that are up for lease renewal in the next five years. He reiterated plans to close up to 10 loss-making stores and to cut the size of 30 outlets, by handing over space to restaurants and other food businesses. The chain has 241 stores, 165 of them in the UK.

Debenhams expects pretax profits for the year to be between £35m and £40m, well below City forecasts of £50.3m.

Its shares plunged nearly 20% in early trading, and were later down 14% at 16.9p. They have lost more than half their value since the start of the year, when they were changing hands at 35.16p.

Like-for-like sales grew by 1.7% in the 15 weeks to 16 June, while digital sales were 16% ahead. Clothing sales have struggled while beauty declined, due to lower makeup sales even though skincare did better.

In April, Debenhams announced that first-half profits had slumped 85% to £13.5m.

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.”

He noted that some rivals had been discounting for 10 out of the past 15 weeks and that some fashion chains were offering 50%-60% price cuts. Debenhams has also cut prices, but to a lesser extent.

The former Amazon executive, who took the reins at Debenhams two years ago, vowed to push cost savings further and to focus on digital sales, in particular mobile. Debenhams appointed a new head of digital last month and online growth picked up in the last quarter following improvements to the retailer’s website.

It has modernised some stores and hopes designer collaborations will help turn sales around, such as Preen – a brand worn by the Duchess of Cambridge – and Richard Quinn.

Debenhams said it would sell non-core assets, namely its Magasin du Nord chain of six department stores in Denmark and a small printing business in the UK.

Nicholas Hyett, an equity analyst at Hargreaves Lansdown, said: “In 2013 Debenhams was posting pretax profits of more than £150m a year, but half a decade of falling sales and heavy discounting has trashed margins and left the group struggling to make ends meet.

“Bucher’s recovery plan seems like the right idea. A background at Amazon means online sales are taking centre stage, and growth here has been strong. Playing to the group’s strengths in cosmetics and concessions also makes sense. Unfortunately it all feels like Debenhams is playing catch-up with an industry that’s left it behind.”