• Struggling UK department store retailer has issued its third profit warning this year.
  • Shares in the group were down 12% in early trading on the back of its third-quarter trading update.
  • Pre-tax profit for FY2017/18 is now expected at GBP35m-40m, in comparison to FY2016/17's reported profit before tax of GBP59m.
For the 15 weeks ended 16 June, Debenhams like-for-like sales dropped 1.7%

For the 15 weeks ended 16 June, Debenhams' like-for-like sales dropped 1.7%

Shares in Debenhams tumbled by 12% in early trading this morning (19 June) as the British department store group said it expects to miss full-year profit forecasts in what will be the retailer's third profit warning this year.

For the 15 weeks ended 16 June, Debenhams' like-for-like sales dropped 1.7%. The company said against a background of increased competitor discounting and weakness in key markets, trading in May and early June has been below plan despite weak comparatives.

Digital sales, however, were up 16%, driven by mobile demand, while group gross transaction value slipped 1.5% in the period.

Looking ahead, the retailer said it has reassessed its expectations for the balance of the year and now expects gross margins to be about 150 basis points down on the prior year, while cost guidance has been tightened to about 0%, down 0.5% in constant currency.

Fiscal 2018 pre-tax profit is now likely to be in the range of GBP35m-GBP40m, in comparison to the current market consensus of GBP50.3m and FY2016/17's reported profit before tax of GBP59m. This compares to the GBP55m-GBP65m Debenhams forecast in January following a disappointing Christmas season and a warning in April that full-year pre-tax profit was expected to be at the lower end of current broker forecasts, at between GBP50m and GBP61m.

As a result, in a best-case scenario profit would drop by 32% on last year.

Meanwhile, Debenhams says year-end net debt will be in line with its previous guidance, at GBP320m, and while still pushing ahead with key strategic initiatives, the retailer is planning for a material reduction in FY2019 capex. As a result, it expects net debt to be lower in FY2019 than in FY2018. The company adds it also intends to conduct a strategic review of non-core assets, aiming to focus investment behind its strategy.

The company is currently in the midst of its 'Debenhams Redesigned' strategy, unveiled last year in a bid to drive growth but also find efficiencies through simplifying and focusing the business.

Revealed in April, the plan is aimed at making Debenhams more digitally-driven and more of a "destination" shop. It will work alongside Debenham's 'Fix the Basics' plan, which is already underway to switch around 2,000 staff to customer-facing roles, replenish stock faster, and de-clutter the store environment, amongst other things.

It also includes plans to review the closure of up to ten UK stores and exit some non-core international markets over the next five years.

Now, the retailer says its commitment to GBP20m in cost savings are on-track and it continues to focus on five priority actions to mitigate current market conditions and drive progress in FY2019.

These include revitalising fashion product under new leadership, with the Designers@Debenhams reinvention under way; delivering above-market digital sales growth driven by technological change focused on mobile; sustaining leadership in beauty through innovative customer engagement both in-store and online; changing in-store experience for customers through redesigned service model and store presentation; and accelerating cost-reduction activity to underpin announced annualised savings of GBP20m.

Sergio Bucher, CEO, 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. We see clear evidence of progress as our digital growth outperforms the market and customers respond positively to our product improvements and format trials. 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."

Sofie Willmott, senior retail analyst at GlobalData, notes Debenhams' weak third-quarter results and profit warning come as no surprise following the ongoing plight of mid-market department stores as they struggle to remain relevant.

However, despite disappointing sales, Willmott says Debenhams has fared much better than its close competitor House of Fraser so far in 2018.

"With over half of House of Fraser's 59 stores proposed for closure and Debenhams being one of the top retailers that its clothing customers also shop at, Debenhams will have the opportunity to win shoppers and capture spend," she says.

But while Debenhams' strategy addresses all of its key problem areas, "we are yet to see evidence that it is paying off", Willmott notes.

"There is a glimmer of hope in online performance with digital growth improving to +16% in Q3, outpacing non-food online growth, which GlobalData forecasts to be 7.1% in 2018, but considering the online channel accounts for about 21% of revenue, other areas of the business need to start contributing in order to drive long-term success."

Richard Lim, CEO of Retail Economics concurs.

"These results build on the pessimistic outlook for UK retail. It's clear that the business is battening down the hatches, strengthening its balance sheets and preparing for tough times ahead. 

"We've seen a slew of bad news this year and the acceleration of structural changes is taking its toll on department stores who are burdened by significant fixed costs. Shackled by too much space, inflexible leases and, in some cases, too much debt, the race is on to execute a shift in business models quickly enough to keep up with changing market conditions. 

"Concerns about overcapacity is at the heart of the challenge for many retailers. Debenhams, along with many others, will need to push forward right-sizing initiatives and form strategic partnerships with other third parties to sweat assets more effectively in a move become fit-for-purpose in today's digital age."