Debenhams sales keep falling, but debt cut as bank talks start

However, a decline of 5.6% in gross transaction value and 5.7% in like-for-like sales over the 18 weeks to 5 January was worse than the respective 2% and 2.7% falls in the past full year, though at least did not spark another profit warning.

For the key six weeks at the end of the period, gross transaction value declined 3.8%, with group LFL sales down 3.4%.

Debenhams said UK sales declined by 3.6% in the Christmas period, with weak store footfall offset by growth in digital fingerfall, while UK sales were down 6.2% over the entire first quarter.

Profits are likely to be further affected as the chief executive Sergio Bucher and his team reacted to what they called a "volatile" UK trading environment, with customers keenly seeking out promotions.

"We responded to a significant increase in promotional activity in the market, particularly in key seasonal categories, in order to remain competitive for our customers," Bucher said, which he acknowledged will result in some gross margin erosion in the first half.

He and new chief financial officer Rachel Osborne have taken "decisive steps to maintain rigorous cost and capital discipline", while further cost savings have been identified, with the annualised £50m expected by 2020 bumped up to "at least £80m".

In October, the pair said their "decisive steps" would involve closing up to 50 stores over the next three to five years and withdrawing the final dividend in order to preserve cash.

The first quarter saw continued cash generation, with net debt cut to £286m as of 5 January, down from £321.3m.

While there is still plenty of headroom within the total committed debt facilities of £520m in place until 2020, the company said the requirement to refinance existing bank facilities within the next 12 months had led to "constructive discussions" beginning with lenders.

An update on progress was promised "shortly", but the group has "put on hold any further asset disposals until the outcome of those discussions is known", likely referring to speculated sale of its Magasin du Nord business in Denmark, though the talks are including an examination of options to bring "new sources of funding into the business to ensure the appropriate capital structure". On a conference call later, management ruled out talks with major sharholder Sports Direct, whose boss Mike Ashley had offered a loan to Debenhams before Christmas, though a possible company voluntary agreement (CVA) with landlords remained one option.

Plus-points in the update included a 6% rise in digital sales in the six-week period and 4.6% across the first quarter, supported by improved mobile conversion and customer experience.

Also, among the bricks and mortar estate, the nine stores that have been transformed under a new design format together outperformed the core chain, while the new strategy for beauty products drove growth in market share in skincare but offset by a decline in the premium make-up market.

REACTION & ANALYSIS

Debenhams shares, which fell to an all-time low below 4p just before Christmas but rallied a little since, were down 8% to 5.17p on Thursday morning.

Several analysts made the point that the group had managed to avoid a profit warning, though margins will be eroded.

"Debenhams is really under the cosh with a heavy fall in sales, and its margin will take a hit too because it’s been forced into cutting prices to attract bargain hunters," said Laith Khalaf at Hargreaves Lansdown. "The department store says it remains on track to deliver profits in line with market expectations, but it’s still early days in Debenhams’ financial year, and it looks like cost cutting is going to be front and centre of keeping profits above the water mark."

Neil Wilson at Markets.com noted signs of progress online, especially mobile, as area where Bucher has expertise. "Digital helped offset some of high street problems but Debs has a long way to go yet," he said.

He said the margins warning due to discounting "could yet turn into a bigger kind of warning but we await to see what happens. For now additional cost savings are shoring up the guidance but there’s only so pennies down the back of the sofa that can be found."

Wilson felt investors will probably be more interested in discussions with lenders, having eschewed the loan offered by major shareholder Sports Direct's Mike Ashley. "It remains to be seen what happens, but there is still a very strong case for the HoF-Deb tie up under Ashley."

Tom Musson at broker Liberum said the trading update "tells us that Debenhams has reconfirmed the general view from other retailers than Oct/Nov trading was particularly difficult, but a decision to tactically promote later in the year benefitted trading performance, particularly online".

He also highlighted the Sports Direct offer. "A refusal to accept help from Mike Ashley, both financially and strategically, places a much greater spotlight on what the management team actually decide to do and act upon. There is nothing in this statement that provides any confidence that the group will directionally move positively, and unless negotiations with landlords are forthcoming swiftly, heightened levels of concerns will rise during H1."