Search Share Prices
Debenhams profits dwindle as snow and costs add to range of woes
Debenhams profits plunged 85% in the first half of its financial year as like-for-like sales slipped amid the "challenging UK market background" and heavy snow, while finance director jumped ship to join a department store rival.
Revenue shrank 2.4% to £1.3bn in the 26 weeks to 3 March as LFL sales dropped 2.2%. UK sales were down 3.7% to £1.07bn and the much smaller international business grew sales 3.5% to £253m.
Reported profits before tax slumped to £13.5m from £87.8m while underlying PBT, which excludes costs associated with the strategic review and the restructure of warehouses and logistics, halved to £42m. Net debt climbed 14% to £248m and is expected to be between £300m-320m by year-end.
With earnings per share down 85% to 0.9p or 52% lower to 2.8p at the underlying level, directors have decided to halve the dividend to 0.5p, 'rebasing' the payout in order to keep dividends covered at least twofold by earnings.
Chief executer Sergio Bucher, the former Amazon executive who launched his Debenhams Redesigned strategy a year ago and has faced a crescendo of takeover speculation in recent months, said: "The UK retail environment is undergoing profound change, and with the help of some important new senior hires, we are moving faster and working harder than ever to ensure Debenhams is well-placed to outperform in this new retail world.
"We expect no help from the external environment, so we are focused on delivering our Debenhams Redesigned strategy, aiming to mitigate difficult trading conditions through self-help initiatives."
He can also expect no help from chief financial officer Matt Smith, who is leaving to join Selfridges. A search has begun for his successor and in the meantime Matt will continue in his role to ensure an orderly handover.
COSTS UPPED, PROFIT GUIDANCE CUT
Bucher highlighted some of the extra trials in the first half, having already warned about a poor Christmas period then bemoaned the heavy snow in the final week of the half, which he said had a "material impact" on the results as 100 stores were forced to close. Moreover, exceptional costs over three years are now expected to be £85m versus previous guidance of £55m, with additional store impairments and staff change costs. Of this roughly £50m will be cash costs.
Based on the board's current view of the second half of the financial year, PBT for the for the year to September is expected to be at the lower end of the current range of broker forecasts of £50-61m. In January, Bucher had projected profit would fall to £55-65m.
On the upside, digital growth of 9.7% continued to outpace the market, though was slower than the 13% growth seen last year. The mobile site is the group's largest and fastest-growing 'store', attracting more than 150m visits and with annualised revenues approaching £250m as orders via smartphones grew 35% in the half and accounted for 33% of digital sales.
"We are holding share in a difficult fashion market, and in other categories such as furniture, exciting new partnerships have the potential to transform our offer," Bucher said.
Though most stores are large and unwieldy Debenhams is tied down to an average lease length of 18 years. There was no material changes to the plans for 10 store closures, of which two have been completed. However, there is the potential to right-size 30 shops and highlighted that 25 stores are coming up with lease expiries over the next five years.
REACTION & ANALYSIS
Debenhams shares were down more than 7% to 21.6p in early trading, having recently come off their 19.9p low at the end of last month.
Independent retail analyst Nick Bubb said the numbers were "predictably poor" and said the report was "dressed up with more guff" from the Bucher about the success and the acceleration of his "Debenhams Redesigned" strategy.
"It is interesting that the CFO Matt Smith doesn't want to hang about to see the results of this and is off to take the much easier job of being FD of Selfridges."
Broker Canaccord noted that the weather took around one percentage point off LFL sales and profits were lower than expected, but that the halving of the dividend was as predicted.
Encouraging signs, however, were seen from the Redesigned strategy, with a "raft of initiatives to improve the consumer proposition across categories as well as to make the business more flexible and efficient continue to deliver encouraging signs".
Canaccord analysts saw "red flags" in the metrics, "in terms of high operational (2.2% EBIT margin), financial (1.7x EBITDA fixed charge cover) and seasonal gearing (90% of profits in H1)" and that the volatility of earnings "is high and the balance sheet is not as strong as it should be for a business with these characteristics".
"Nonetheless, Debenhams has held its clothing market share in a difficult market. This suggests to us that the consumer proposition is viable," they said, combining this with shares trading for seven times full year forecast earnings and a 7% yield, to keep its recommendation at 'hold'.
Russ Mould at AJ Bell noted that, unlike Next, Debenhams was slow to adapt to the online world, and had previously failed to focus on full-price sales, though Bucher was trying to fix both of these now, while its large format stores are not sufficiently local or convenient for customers to use them as click-and-collect stops.
Bucher is doing what he can to tackle excess floor space. "Two stores have been closed and up to eight more may follow while space has been reduced at one site."
"However, Debenhams leases average 18 years in length and this does limit the company's room for manoeuvre and it remains to be seen how much of a dent that any future negotiations with landlords will make in the £4.5bn lease commitments disclosed in the 2017 annual report and accounts, based on current terms and conditions.
"This is a considerable burden on the company's profits and cash flow and one casualty has been the dividend payment where the old adage 'if a yield looks too good to true, then it usually is' has claimed its latest victim."