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Debenhams shares crash on profits warning Debenhams shares crash on profits warning
(about 14 hours later)
Shares in Debenhams tumbled 10% as it issued a surprise profits warning, blaming the snow that blanketed Britain in January. Debenhams blamed the snow for a surprise profits warning that sent its shares tumbling more than 14% on Monday.
The company said like-for-like sales dropped 10% between 14 and 27 January when "the UK business was severely disrupted by the snow which fell across the country". Its shares dropped to 85p in early trading. Sales at Britain's second-largest department store chain dropped 10% in the two weeks of January during which the UK was blanketed in snow, and failed to recover in February, hitting full-year profits and margins.
This may be the first of a series of bad results from retailers hit by the snow. Debenhams pointed to data from accountants BDO, which showed like-for-like sales across fashion retailers dropped by an average of 10.5% over the two-week period. But analysts said Debenhams appeared to be among the worst hit, as it failed to recoup sales in the following weeks. The chief executive, Michael Sharp, said disruption from the snow had affected all retailers, pointing to data from accountants BDO that showed like-for-like sales across the sector dropped by an average of 9% over the two-week period.
Britain's second-largest department store chain launched sales for Valentine's Day, half-term and the end of the month to try to make up for the dire performance, but said it failed to fully recover sales lost in January. As a result, it expects pre-tax profits for the first half to come in at £120m, rather than the £130m analysts had pencilled in, and more than 5% lower than in the first half last year. Like-for-like sales for the six months to 2 March rose by 3%. "The disappointing factor is the impact of snow," he said. "It's quite clear what the problem was and it's now behind us."
Chief executive Michael Sharp said the snow fell during the key January sales period, meaning the store still had leftover Christmas stock to shift after the thaw. "That was a period where customers were still looking to buy bargains. When you get into February, people are starting to look for new products." Any remaining stock therefore needs to come with even deeper discounts, he said, which hit margins. But analysts said Debenhams appeared to be among the worst hit, as it failed to recoup full-price sales in the following weeks.
Gross margins for the first half will be around 0.2% lower than in the same period last year and will be flat for the full year, rather than rising by 0.1% as previously forecast. Overall, UK retail sales in February enjoyed their strongest growth for three years, according to the latest health check of the sector. The British Retail Consortium-KPMG retail sales monitor released today showed like-for-like retail sales rising 2.7% compared with February last year.
That will worry analysts who say Debenhams have been buying too much stock and discounting heavily to clear it. Kate Calvert of Seymour Pierce said: "They are hooked on promotions. Their customers know there is no point paying full price for things." But Sharp defended the store's strategy. "Customers like our promotions, they feel they offer genuine value for money and that is one of the reasons they shop with us." Helen Dickinson, director general of the BRC, said: "After the disappointing figures that brought 2012 to a close, it's reassuring that the sales momentum established during January has built, not faded. There are certainly highly welcome signs here of gradual improvement and customers feeling a bit more positive. But it's too soon to assume this represents the permanent turnaround we need."
Food sales held up well, with like-for-like sales up 1% over the year, despite the horsemeat scandal. Joanne Denney-Finch, chief executive of industry analysts IGD, said: "Although there was a lot of 'switch buying', such as a fall in frozen burger sales in favour of more ingredients to cook from scratch, the overall effect on food and drink sales was neutral."
Like-for-like sales of other, non-food products rose by 1.9% over the year. The survey said department stores performed well, as promotions helped to boost sales.
Separately, Visa Europe said a survey of consumer spending showed a second successive monthly rise last month. Spending on Visa cards, which account for one in three of all purchases, was 0.8% higher in February following a 0.9% rise in January, though the underlying trend was still weak, with a decline in the rate from one quarter to the next of 1.1%.
Debenhams said it launched promotions for Valentine's Day, half-term and the end of the month to try to make up for the dire performance during the icy weather, but failed to fully recover sales lost in January. As a result, it expects pre-tax profits for the first half to come in at £120m, rather than the £130m analysts had pencilled in, and more than 5% lower than in the first half last year. Like-for-like sales for the six months to 2 March rose 3%.
Sharp said the snow fell during the key January sales period, so there was still leftover Christmas stock to shift after the thaw. "When you get into February, people are starting to look for new products." That meant last year's stock had to come with even deeper discounts, he said, which hit margins. Gross margins for the first half will be around 0.2% lower than in the same period last year and will be unchanged over the full year, rather than rising by 0.1% as previously forecast.
That will worry analysts, who say Debenhams has been buying too much stock and discounting heavily to clear it. Kate Calvert of Seymour Pierce said: "They are hooked on promotions. Their customers know there is no point paying full price for things." But Sharp defended the store's strategy. "Customers like our promotions, they feel they offer genuine value for money and that is one of the reasons they shop with us."
Debenhams is aiming for 4% growth in like-for-like sales in the second half and is thought to be buying enough stock to meet that target. Calvert said: "That seems a very aggressive trading strategy in the current climate."Debenhams is aiming for 4% growth in like-for-like sales in the second half and is thought to be buying enough stock to meet that target. Calvert said: "That seems a very aggressive trading strategy in the current climate."
Sharp said conditions on the high street would continue to be difficult this year. "The reality of life is we are bumping along the bottom. We've talked in the past about customers becoming acclimatised to the new economic reality. We are not expecting any bounce-back this year." Sharp said conditions on the high street would remain tough this year. "The reality of life is we are bumping along the bottom. We've talked in the past about customers becoming acclimatised to the new economic reality. We are not expecting any bounce-back this year." But he was confident Debenhams could grow sales in the second half. The shares dropped to 81p.
But he was confident Debenhams could grow sales in the second half. "The disappointing factor is the impact of snow. It's quite clear what the problem was and it's now behind us." The company will publish its first half results on 18 April.