Shares in Debenhams tumbled by 16 per cent today after the department store warned profits would be lower than previously forecast after it saw poor demand for post-Christmas bargains.
Debenhams said discounts and promotions in the run up to Christmas boosted trade, with like-for-like sales in the six weeks Christmas period rising 1.2 per cent at a constant currency basis.
However, the heavy discounting damaged margins and on top of that, in spite of further price markdowns, the first week of post-Christmas sales was ‘below expectations’.
Sales fall: Debenhams has now downgraded its 2018 profit forecast to between £55million and £65million
In a trading update brought forward from next week, Debenhams said UK like-for-like sales fell 2.6 per cent in the 17 weeks to the end of December, with most of the pain concentrated in the first week of the reporting period.
Group like-for-like sales declined by 1.8 per cent but digital sales rose by 9.9 per cent.
In this light, Debenhams has now downgraded its 2018 profit forecast to between £55million and £65million, against expectations of £83million.
Shares in the company dipped by almost a quarter in early trading to recover slightly and trade 16.7 per cent, or 5.94p lower, at 29.64p.
Sergio Bucher, chief executive of Debenhams, said the market had been ‘challenging’ and that the group’s move to lower prices had impacted profits.
‘Nevertheless, we are seeing positive early signs from the changes we have made as part of our Debenhams Redesigned strategy,’ he added.
Debenhams’ Christmas update is in contrast with yesterday’s updates from Next, Poundland, John Lewis and Jigsaw, which instead boasted of strong seasonal takings.
Laith Khalaf, senior analyst at Hargreaves Lansdown commented: ‘Debenhams has been forced to cut prices to persuade shoppers to part with their cash, and as a result margins have been squeezed, profits have been significantly downgraded, and the share price has taken a massive hit.
‘On Wednesday Next’s trading update hinted that the retail environment might not be as bad as feared, though the latest announcement from Debenhams illustrates the danger of drawing too many conclusions from a sample of one.
‘By this time next week we should have a much better idea of how the retail industry and the UK consumer is doing, with the likes of M&S, John Lewis, Tesco and Sainsbury handing in their Christmas scorecards.’
Amisha Chohan, equity research analyst at Quilter Cheviot, added: ‘Debenhams 27% decline in profit guidance following the Christmas period was driven by weaker than expected sales and lower margins as a result of increased promotional activity.
‘We continue to believe Debenhams is structurally challenged by a customer proposition lacking differentiation and an inflexible store estate, forced to continue investing in online assets, which typically deliver a lower return. The dividend may also be at risk, due to an increase in investment in the business.’