“Drastic changes” are needed to generate shopper appeal at Debenhams according to one analyst, as the struggling UK department store retailer warned it expects to miss full-year profit forecasts after a disappointing end of season sale.
Shares in the British department store group were down by 15.7% this morning (4 January) on the back of its Christmas trading update.
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For the 17 weeks to the end of December, the retailer posted a 1.8% drop in group like-for-like sales in constant currency, including a 2.6% drop in UK like-for-like sales and a 2.1% rise in international.
Digital remained strong with sales up 9.9%, and two-year growth of 22%, while smartphone demand was up 36% year on year, with a 20% improvement in conversion rate following the progressive web-app driven improvements made to its mobile site.
Debenhams said the early weeks of the quarter were disappointing as the market remained volatile and competitive. “We took tactical promotional action to improve our performance, which resulted in a stronger six week Christmas period against tough comparatives,” the retailer added but admitted the first week of post-Christmas sale was “below expectations”, despite further markdown investment.
Looking ahead, gross margins for the first half of the year are now expected to be 150 basis points down on the prior year, while the retailer said should the “current competitive and volatile environment” continue into the second half, fiscal 2018 profit before tax is now likely to be in the range of GBP55m-GBP65m.
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By GlobalDataThe 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.
Debenhams considers store closures under turnaround strategy
Now, the retailer says it has identified cost savings of GBP10m above previous guidance but warned it plans to accelerate some aspects of its strategic plan to deliver a “long-term sustainable future for Debenhams.”
CEO Sergio Bucher said: “The market has been challenging and particularly promotional in some of our key seasonal categories and we have responded in order to remain competitive for our customers, which has impacted our profit performance. Nevertheless, we are seeing positive early signs from the changes we have made as part of our Debenhams Redesigned strategy. The market dynamics we have seen have reinforced our view that we need to move even faster to implement the cultural and organisational changes needed to ensure Debenhams is in the best possible shape for today’s fast-changing retail environment.”
Sofie Willmott, senior retail analyst at GlobalData notes as the first department store retailer to report on Christmas trading, Debenhams’ performance does not provide much hope for non-food retail sales at the end of 2017.
She adds: “Given the barrage of discounted products available in the lead up to Christmas including Black Friday, it’s no surprise that Debenhams’ end of season sale produced disappointing results, despite “further markdown investment”. Discerning consumers with squeezed budgets are looking for value for money and by constantly reducing the price of goods Debenhams is damaging customer perception of value, discouraging shoppers to buy from the retailer.”
“Though the retailer promised to accelerate its growth plan to safeguard its future, including restructuring to create a more agile operating model, drastic changes are needed to generate shopper appeal and it is vital for the retailer to steer away from its distressed brand image of late.”
According to Willmott, the online channel has undoubtedly been the success story over the peak period, while store performance remains a huge challenge.
“Debenhams credited improvements made to its mobile site for a 20% rise in conversion and 36% lift in smartphone sales, demonstrating that it must continue to invest in enhancing the online shopping experience to bolster total sales and to compete with online market leaders like Amazon and Asos,” she adds.
Last month, the retailer restructured its business around three units amid the appointment of a managing director for its fashion and home divisions.
Debenhams appoints fashion head amid restructuring
