The FTSE All-Share retailer’s weaker than anticipated Christmas sale period brought UK retail investors crashing back to earth fresh from the highs of Next’s upgraded earnings the day before.
Its shares slipped to their lowest point in nine years on Thursday, falling from 35.6p to 27.6p in the first half hour of trading.
Increased promotional activity during the Christmas shopping period and weaker sales in its seasonal gift category took their toll on the retailer, prompting it to downgrade its profits guidance by 27%. It now anticipates profit before tax for FY 2018 to fall between £55m and £65m.
Though the longstanding British department store saw an improvement in group gross transaction value in the six weeks to 30 December 2017, over the 17-week period, its total transaction value declined by 0.8%.
Group like-for-like (LFL) sales in constant currency also fell by 1.8%, mainly driven by its performance in the UK, which was 2.6% lower on a LFL basis. Sales across its international stores did rise by 2.1%, however, as did digital sales by 9.9%.
“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,” said Debenhams chief executive Sergio Bucher.
“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.”
Debenham’s disappointing set of figures could indicate a rude awakening for the UK retail sector as a whole, according to Lee Wild, head of equity strategy at Interactive Investor.
“Turns out Next may have given retail sector investors a false sense of security yesterday,” he said.
“Debenhams brought things down to earth with a bump, warning that the fourth quarter of 2017 was bookended by weak trade and that heavy discounting has damaged margins.”
Thursday’s trading update is a further sign that the retailer “is structurally challenged”, said Amisha Chohan, Quilter Cheviot equity research analyst.
“We continue to believe Debenhams is structurally challenged by a customer proposition lacking differentiation and an inflexible store estate (average lease 19 years), forced to continue investing in online assets, which typically deliver a lower return,” she said. “The dividend may also be at risk, due to an increase in investment in the business.”
