Debenhams Plc, the U.K.’s second-largest department-store chain, became the first victim of increased holiday discounting by Britain’s retailers as it said profit will drop in the first half of the financial year.
An anticipated surge of Christmas business failed to materialize and has left Debenhams with a backlog of inventory to clear in the next two months, the London-based company said today, sending the shares down as much as 15 percent.
Debenhams was among U.K. stores that started offering discounts of as much as 50 percent before Christmas as shoppers delayed purchases to wait for bargains. That’s taken its toll on profitability, with first-half pretax profit expected to be about 85 million pounds ($140 million), down from almost 115 million pounds a year earlier, the retailer said today.
“This is not Debenhams-specific and it’s unlikely to be the only profit warning we’ll see over the next few weeks,” said Bryan Roberts, an analyst at Kantar Retail in London. “Wandering down the high street, you see so much excess stock that will need to be discounted even further.”
Debenhams shares fell 11 percent to 73.80 pence at 11:40 a.m. in London, reducing the company’s market value by about 115 million pounds to 905 million pounds.
The drop was mirrored by competitors. Marks & Spencer Group Plc, which also offered discounts prior to the holiday, fell as much as 2.8 percent ahead of a Jan. 9 sales update. Next Plc, which refrained from discounting until after Christmas, slipped as much as 0.6 percent. The owner of the Next Directory home-shopping business is due to report Jan. 3.
Debenhams said same-store sales rose 0.1 percent in the 17 weeks ended Dec. 28, citing dwindling shopper numbers, pressure on household incomes and unseasonal weather. Gross margin for the first half will narrow by 80 to 100 basis points because of the discounting needed to shift inventory, the company said.
“As has been widely commented on in the media, the market was highly promotional in the run-up to Christmas and we responded to these conditions to ensure our offer was competitive,”Chief Executive Officer Michael Sharp said. “However, this extremely difficult environment has inevitably had an impact on both our sales and profitability.”
Given current business conditions, Debenhams said it has decided to cease its share buyback program.
Both sales and profit margins were weaker than expected, Citigroup Inc. analyst Richard Edwards said in a note. Estimates for full-year pretax profit will need to be reduced by at least 20 percent, the brokerage said.
Debenhams has company-specific difficulties that include a shift into lower-margin product categories, a promotional approach to business, and a heavy reliance on own-brand product, according to Andrew Wade, an analyst at Numis Securities. 2014 may mark the fourth year of consecutive earnings decline in Debenhams U.K. business, he said in a note.
Attention will now turn to next week’s update from Marks & Spencer, according to Clive Black, an analyst at Shore Capital in Liverpool, England. Black said in an e-mail he has “growing doubts” that M&S will be able to maintain full-year forecasts, while noting that the London-based company has “food and self-help not available to Debenhams.”