Christmas Trading Update

British department store Debenhams issued its Christmas trading update a week earlier than originally planned. The company reported a decline in sales and issued a profit warning. In the 17 weeks ended December 30, group comps declined by 1.3%, against a strong performance of 3.5% growth in the corresponding period last year. At constant currency, comps declined by 1.8%, compared with a 0.4% increase in the year-ago period. UK comps were down 2.6% and international comps were up 2.1% in the period. Total group gross transaction value softened by 0.8%. Debenhams said that sales grew in the beauty and food categories, but slowed in the seasonal gift category, leading to increased promotions. Online sales grew by 9.9% and sales made via smartphones were up 36%. In response to poor trading in the early weeks of the quarter, Debenhams increased its promotional activity. This resulted in a stronger top-line performance in the core six-week Christmas period ended December 30, but at the expense of profits. In that six-week period, group gross transaction value increased by 2.2%, while comps grew by 1.7% as reported and by 1.2% at constant currency. The company did not state UK-only comps for the period. Debenhams noted that results from the first week of its post-Christmas sale were below expectations, despite the company’s investment in promotions, particularly in the seasonal gift category.

Outlook

The promotions and discounts that Debenhams ran to keep up with its competitors are likely to deplete its gross margin by 150 basis points year over year in 1H18, management said. Previously, the company guided for a gross margin decline of 25 basis points. The company guided that FY18 profit before tax is likely to be £55–£65 million, should the currently volatile trading environment continue into the second half of the fiscal year. The current consensus estimate is for FY18 pretax profit of £68 million. The retailer also expects to save about £20 million in costs as a result of reorganization and restructuring activity in its stores and support center. Costs for the full fiscal year are now expected to rise by 1%, compared with previous guidance of 1%–2%. Consensus estimates were compiled before Debenhams announced the latest results. For FY18, analysts expect group transaction value to rise by 0.9%, to £2,979 million, and EBIT to slide by 9.9%, to £97 million, resulting in an EBIT margin of 3.3%, versus 3.6% in FY17. Analysts estimate that EPS will weaken by 16.7%, to 5.0 pence, in FY18. The company reports half-year results in April 2018.