Debenhams puts brave face on tough Christmas, sees pockets of strength
Debenhams is one of those UK retailers which, along with M&S and Next act as a Bellwether of the UK (fashion) retail economy, so its Christmas trading update Thursday is set to be among the most closely watched.
Will it send confidence in the strength of the firm’s turnaround up or down? The answer is down, down, down. You see, the news wasn’t exactly disastrous, but it wasn’t good either and profits will suffer this financial year after heavy discounting. The post-Christmas period has also been a disappointment and the Debenhams share price plunged Thursday on all that news.
The company said that in the 17 weeks to December 30, group gross transaction value (GTV) dipped 0.8%, while group like-for-like sales fell 1.3%.
Those figures were on a reported basis. But the performance looks a little worse when currency exchange benefits are factored-out. Like-for-likes in constant currency declined 1.8% with UK like-for-likes down 2.6% even though International was up 2.1%.
Digital sales rose a pleasing 9.9% though, with two-year growth of 22%.
DISCOUNTS AND VOLATILITY
So clearly not a great Christmas season. What went wrong for the company at what should have been its busiest time of year? The department stores giant said that the early weeks of the quarter were “disappointing as the market remained volatile and competitive.”
But on the back of that slow start, it took “tactical promotional action to improve performance” which resulted in “a stronger six-week Christmas period against tough comparatives.” It resulted in GTV up 2.2% for the six weeks to December 30, with like-for-likes up 1.7%. (or 1.2% in constant currency) and digital growth of 15.1%.
But it said that the first week of the post-Christmas Sale was “below expectations despite further markdown investment, particularly in the highly seasonal Gift category.”
All that clearance activity will obviously dent profits and the company said gross margins for the first half are now expected to be around 150bps down on the prior year.
It has identified cost savings of around £10 million above its previous guidance so that should help maintain profits, but “should the current competitive and volatile environment continue into H2," full-year profit before tax is now likely to be in the range of £55m to £65m. Last year’s full-year pre-tax profit was £59 million but a year earlier it was £105.8 million.
WEAKNESS AND STRENGTH
The company said the UK trading environment has “continued to be volatile and highly competitive with weaker demand in some more discretionary areas.” The market has become more promotion-driven and "we responded in order to remain competitive for our customers.”
And the picture abroad isn’t brilliant either. Internationally, Magasin du Nord in Denmark and Debenhams in the Republic of Ireland delivered positive like-for-like growth in constant currency, but other markets remained “mixed.”
Back with the UK, Debenhams said it managed to grow sales in its “destination” categories of Beauty and Food and improved its full-price share in Fashion in a market that continues to decline. A “disappointing” Gift performance drove increased promotional activity in this important seasonal category. And it must be even more disappointing given that this had been a major focus area on which the company had been pinning its hopes.
On the bright side, “positive momentum” in digital sales has been driven by further strong growth in demand via smartphones - up 36% year on year. Its has seen a roughly 20% improvement in conversion rates following the progressive web-app-driven improvements made to its mobile site.
The company also said that, despite the weak performance for the Gifts category, it has seen “encouraging indications” from initiatives under its Debenhams Redesigned strategy. Early signs from its store format trials, including new stores at Stevenage and Wolverhampton, and its first “right-sized” store in Uxbridge are “promising.”
And it expects more digital progress this year as it introduces further platform upgrades. Plus it said that it’s “accelerating some aspects of our strategic plan to deliver a long-term sustainable future and continue to review activities that could be more rapidly and profitably delivered through partnerships.”
CEO Sergio Bucher said: "The market has been challenging and particularly promotional and we have responded in order to remain competitive, which has impacted our profit performance. Nevertheless, we are seeing positive early signs from the changes we have made. The market dynamics we have seen have reinforced our view that we need to move even faster to implement cultural and organisational changes.”
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