Debenhams to cut jobs faster after Christmas profit warning, takeover talk grows

Debenhams has pledged to accelerate its restructuring plans after issuing the first profit warning of 2018 as sales fell and "tactical promotional action" misfired in the department store group's crucial festive period.

UK like-for-like sales fell 2.6% in the 17 weeks to 30 December and after cutting prices since six weeks before Christmas in order to try and remain competitive, gross margins for the six-month period are expected to be down around 1.5 percentage points on the prior year.

Even though boss Sergio Bucher and his team have identified an extra £10m of cost savings by bringing forward job cuts, management reorganisation and rates reviews, the likely continuation of the competitive and volatile retail market in the second half of the year, means profit before tax for the year to September is projected to be £55-65m.

Debenhams, which last year made an underlying PBT of £95m, may have to cut its dividend, some analysts suggested.

Boucher, the former Amazon executive who has been in the job for a little over a year, said: "The market has been challenging and particularly promotional in some of our key seasonal categories and we have responded in order to remain competitive for our customers, which has impacted our profit performance. Nevertheless, we are seeing positive early signs from the changes we have made as part of our Debenhams Redesigned strategy.

"The market dynamics we have seen have reinforced our view that we need to move even faster to implement the cultural and organisational changes needed to ensure Debenhams is in the best possible shape for today's fast-changing retail environment."

As well as promising early signs from trials of a new store format in Stevenage and Wolverhampton and Bucher's first 'right-sized' store in Uxbridge, a more flexible operating model is being introduced that is will result in "reorganisation and restructuring activity" of stores and the back office.

This is the source of the £20m of annualised cost savings, of which half will be seen in the current year.

With digital sales up 9.9% in the festive period, though below the 13% growth seen last year, were partly driven through Debenhams' partnership with Mobify, which Bucher said will build through the coming year as further platform upgrades are introduced.

The acceleration of some aspects of his strategic plan will include further partnerships to try and deliver changes more rapidly and profitably.

ANALYSIS: COULD DEB CUT THE DIVIDEND OR BE A TAKEOVER TARGET?

Debenhams shares fell more than 20% to below 28p in early trade on Thursday, their lowest level since the aftermath of the financial crisis in 2009. Sports Direct, which owns 21% of Debenhams, was down more than 2%, while fellow retailers Marks & Spencer and Next were also in the red.

Debenhams' market cap has shrunk by around two thirds to well under £400m, which sparked renewed takeover talk in the City. Bloomberg's Gadlfy suggested it could present Ashley with a potential decision to make -- Sports Direct has an 11 percent stake in House of Fraser's UK business. "While difficult conditions for UK retailers are not good for the value of his own investments in Debenhams and House of Fraser, it does give him the option to pick up a department store on the cheap, if he wanted to."

Analyst Kate Calvert at Investec said potential corporate activity was the key risk for those investors with short positions in the stock. However, overall she was not a big fan of what she saw as "a challenged business with too inflexible a cost base and too many unanswered questions over execution and strategy".

"It’s possible", said Laith Khalaf at Hargreaves Lansdown, "but Mike Ashley hasn’t indicated any appetite for taking over all of Debenhams, and it would still be a sizeable purchase. The fall in the market cap also reflects trading conditions for the troubled retailer, and so any potential suitors would have a bit of a clean-up job on their hands."

Analysts at RBC Capital Markets said the warning would lead to earnings downgrades in the order of 30%, given the group's low margins and high fixed cost base.

While the company blamed challenging market conditions and a tough post Christmas sale period, RBC said it believes Debenhams "has suffered from having a sub-optimal clothing and gifts offer and from being overly reliant on promotional activity to drive footfall and online spend". The analysts added that the statement may cause Debenhams to have to cut its dividend and lead to the company reviewing its high capex investment strategy.

Liberum also noted that while the dividend still remains covered by earnings per share, "it is uncovered by free cash flow". Analysts said the below-expectations trading and the "significant decline" in gross margin led it to cut the full year PBT forecast by 35% from £80.8m to £52.1m, below the company's guidance.

Eight months after launching his Debenhams Redesigned strategy, Bucher "must be wondering what he has let himself in for by taking the job" said Russ Mould of broker AJ Bell, noting that Bucher was brought in to focus on full-price sales and the online business.

Not only that, the group's large format stores are "not sufficiently local or convenient for customers to use them as click-and-collect stop" and "worst of all" are locked into some very long-term leases. Last year ended with just £9.3m property on its balance sheet "offering little asset backing to the balance sheet with which to tempt a bidder".