Why Debenhams’ shares crashed again

Debenhams (DEB) muddied the retail waters today, with investors left wondering if the sector’s first profits warning of 2018 is a sign of things to come, or just a reflection of the major issues facing the department store chain.

Unsurprisingly, the City was taking no chances as traders wiped out the gains enjoyed by the likes of Marks & Spencer (MKS) after Next (NXT) had yesterday reported a better-than-expected Christmas performance.

Debenhams itself tumbled as much as 20% to leave the former FTSE 250 (MCX) stock back at recession-era levels, when it was weighed down by debts left by its former private equity owners.

Stating an investment case for Debenhams has been a struggle ever since for many analysts, which is why the group recently embarked on its Debenhams Redesigned turnaround under the leadership of Sergio Bucher.

After today’s hefty profits warning, Bucher admitted that the group will need to “move even faster” if it is to counter challenging market dynamics.

The group’s crucial first quarter trading period started badly, with volatile and competitive conditions prompting the need for tactical promotions.

This strategy helped like-for-like sales rise 1.2% in the six weeks of peak Christmas trading, but the progress came at the expense of margins. To rub salt into the wounds, the first week of the Debenhams post-Christmas sale was below expectations despite further markdowns.

Seasonal gift items struggled to sell, but Debenhams noted that it grew sales in beauty and food, and also improved its share of a declining fashion market.

Overall, it now expects annual profits to be in the range of £55 million to £65 million in the year to September.

Investec Securities responded by cutting its 2018 profits forecast by 27% to £59.6 million, while reducing its target share price from 34p to 28p.

Analyst Kate Calvert said: “Debenhams is still a challenged business with too inflexible a cost base and too many unanswered questions over execution and strategy.

“Wider structural pressures from the online shift means it is difficult to see any real profit progression beyond a rebound from FY18.”

Bucher’s turnaround plans, which were first unveiled in April, involve positioning the chain as a destination for “Social Shopping”, with smartphone interaction with customers at the heart of the strategy.

It has been working with Mobify to make its mobile website significantly faster and more responsive, while also investing in digital beauty services provider blow LTD ahead of rolling out a nationwide offer.

Debenhams said that new store format trials, including at Stevenage and Wolverhampton, had delivered promising early results. Its attempts to make better use of store space have also included a trial partnership with Sweat! for gyms in some of its stores.

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