Investec downgrades Debenhams on structural challenges

Investec downgraded Debenhams to ‘sell’ from ‘hold’ and trimmed the price target to 67p from 70p amid expectations of little profit over the medium term.

The brokerage said new chief executive does not change the fact there are structural challenges at the company.

“With cost pressures, a less flexible business model and online shift, it is difficult to see how sustainable growth can be injected into an undifferentiated business,” it said.

Investec said that while Debenhams has self-help opportunities – space optimisation, operating efficiencies and mark down – these are likely to be offset by material wage inflation and margin reinvestment back into differentiating the offer.

The brokerage said the stock’s valuation reflects a declining profit trend for 10 years and is not demanding, but a re-rating seems unlikely.

“We believe the next CEO needs to invest margin in re-establishing the ‘Designers’ brand credentials and differentiating own-bought.

“We are also concerned that growth is mainly coming from concessions (limited operational gearing) & beauty (low margin). This may not offset the in-store negative operational gearing from online shift.”

At 1040 GMT, Debenhams shares were down 0.7% to 75.70p.