Debenhams Christmas trading update: What the analysts say

Kate Calvert, Investec:

“Trading and gross margin over the 19 weeks were weaker than expected resulting in a nudge down in forecasts. While it is encouraging that management stuck to its new trading stance with 10 fewer days on promotion, we continue to believe that Debenhams is strategically challenged and needs to reinvest further gross-margin opportunity back into the offer. While the valuation is undemanding, we see little potential for a medium-term profit recovery.”

John Stevenson, Peel Hunt:

“Debenhams delivered a fairly strong peak-trading performance, offset by the weak start to autumn/winter. Consensus forecasts are likely to be cut by around 2%, a reasonable outcome against much greater downgrades across the apparel stocks. Management has made good progress on driving full-price sales mix and lower promotional activity.”

Greg Bromley, Conlumino:

“In contrast to the profit warning issued around the same point last year, Debenhams has today posted a much healthier set of festive results. While LFLs fell over the 19-week stated period, it is fair to say the department store appears to have made progress on its five priorities to improve its performance. Particular highlights included the record group sales in the seven days prior to Christmas and the surge in online sales of 28.9% in the four weeks to January 10. Crucially, with Debenhams now more carefully managing its promotional activity, Black Friday proved something of a success, with sales in the week up 10.3% and online sales on the day rising a staggering 125%. 

“While Debenhams’ trading performance across the wider period (19 weeks to January 10) was nothing to write home about, this was inevitably influenced by slow sales in clothing due to unseasonably warm weather during October and November. The retailer also felt the impact of a reduction in its promotional strategy; while Debenhams has been among the first to discount over the last few years, this year its sale launched on Boxing Day, while its Blue Cross event was delayed by a week to January 8. Debenhams has made significant progress on refocusing its promotions and over this period the retailer had fewer days on promotion, less stock reduced and smaller discounts. This resulted in a 12.1% increase in full-price transactions.”

Matthew McEachran, N+1 Singer:

“Debenhams entered the A/W season with a substantial change programme aimed at rebuilding full-price sales and profitability vs last year’s poor result. Conditions for seasonal sales (c50% of mix) were terrible though, so the plan was never going to yield a perfect outcome. However, today’s update offers encouragement in terms of the revised policies and forecasts are unchanged as a slightly weaker margin is offset by slightly better cost guidance.”

Warwick Okines, Deutsche Bank:                  

“The work by Debenhams in the past year, particularly around its logistics infrastructure, enabled the business to deliver a strong December peak performance. Four week like-for-likes were +4.9%. In spite of this robust operational performance, the challenging environment and the transition of the business took its toll. Sales and gross margins for the broader 19-week period were below our forecasts and even with cost efficiency we cut our forecasts by 4%. In the final analysis, the company has not grown its profits from the base set by the profit warning last year.

“We have been impressed by the progress made in 2014, particularly in e-commerce logistics and shifting to a less promotional positioning. The next day to store promise, which the company did not offer last year, represented 38% of all online orders in the week before Christmas. Online growth of around +29% in December was the best performance in over a year. This is despite it over-indexing in clothing, which was the weakest category, and promotions, which the company is de-emphasising.”

Eithne O’Leary, Oriel:

“Tight cost control compensates for a modest dilution to the gross-margin guidance: Importantly stock levels have been carefully controlled despite volatile demand. Clothing stocks will be down by more than 5% by the end of the first half and management has held to its promise to reduce the numbers of days spent on promotion. However, the scale of the wider difficulties in the clothing market has meant that the gross margin gain will be at the lower end of the guidance of an uplift of 10bps to 40bps. Further progress on the gross margin front was also frustrated by the rise of beauty and concessions within the sales mix. That said, the investment into the proposition has clearly paid off and Debenhams appears to have coped admirably with the 125% increase in online orders around Black Friday. Indeed management’s control of the cost base is impressive. We estimate that cost rose by just over 1% in the first, a result that has helped cost guidance for the year come to hit the lower end of the guided range of +2% to +4%.”