Debenhams Reduces Discounting Ahead of Christmas Season

Debenhams Plc, the U.K.’s third-largest department-store chain, said it’s reducing the level of discounts ahead of the key Christmas season to avoid the damage to profitability that price cuts caused last year.

Chief Executive Officer Michael Sharp said today that management has set more “prudent” sales targets ahead of the holiday sales period after “overambitious” goals earlier in the year forced Debenhams to discount heavily. Debenhams shares rose as much as 5.7 percent.

The company slashed prices by as much as 50 percent before Christmas last year. Fashion accounts for about half of Debenhams’ sales with beauty products, jewelery and homewares making up much of the rest.

“Debenhams has embarked on a revised strategy of less promotions and discounting, which we believe to be the only way to recover profit margins,” N+1 Singer Ltd analyst Matthew McEachran said in a note to investors. “This strategy has clear medium-term potential albeit short-term risk if customers perceive the offer to have less value.”

The shares traded 3.1 percent higher at 65 pence as of 2:18 p.m. in London. The stock has dropped 11 percent this year and approached a three-year low this month.

Underlying profit before tax fell 21 percent to 110.3 million pounds ($177 million) in the year through August, the London-based retailer said in as statement today. That matched the average estimate of 19 analysts surveyed by Bloomberg.

The company had a “significant turnaround” as the gross margin improved by 0.1 percentage point in the second half due to more selective promotions, Sharp said on a conference call. The first half margin had narrowed 1 percentage point.

Sports Direct International Plc, whose founder Mike Ashley remains its majority owner, bought a 4.6 percent stake in Debenhams in January after the 236-year-old store warned of a profit slide after a weak Christmas period.

Debenhams is contending with weaker consumer spending plus intense price competition. Like-for-like sales were up 1 percent for the year, in line with analyst estimates.

Before it's here, it's on the Bloomberg Terminal.