Debenhams plays the market and tops stock price

Monday, 20 April 2015

ANALYSIS

Debenhams has played the industry this week when it posted positive results for the first half, as opposed to the weaker figures the market anticipated. Consequently, the stock  rallied on the London Stock Exchange, sending the shares to a 15-months high.


Debenhams shares gained 6.6 percent earlier this week, reaching a 15-month high, after the retailer reported profit before tax rose 4.3 percent to 88.9 million pounds for the 26 weeks to 28 February. The company has also cut its debt substantially, reducing it in 62.4 million pounds to 297.3 million pounds.

Spilling the beans on such a strong performance, the department store operator credited its focus on online delivery - up 12.7 percent - was part of its success.

Bryan Roberts from Kantar Retail analysts said: "These numbers mark something of a pleasant surprise, with half-year earnings ahead of expectations and the company seemingly doing a better job of managing its frenetic schedule of promotions and discounts."

Happy with the results, chief executive Michael Sharp said that Debenhams would continue with its current strategy for sustainable growth in the longer term. "Overall we delivered a good first-half performance, despite a difficult clothing season in autumn and we are on track to achieve full-year expectations," summed up Sharp.

What analysts say (now) about Debenhams

Caroline Gulliver from Jefferies recognised that “Debenhams’ first half results have beaten profit estimates by 4 percent”. She argues that bringing forward the ‘New Season Spectacular’ campaign into the first half has been of great help for the second largest British department store chain. “Management’s strategy to reduce promotions, invest in price and increase multi-channel sales is on track,” concluded Gulliver in a research note.

Meanwhile, Cantor Fitzgerald´s analyst David Jeary has shown his doubts about this strategy, pointing out that his firm remains “concerned about Debenhams’ trading prospects for a number of reasons. It remains too early in our view to judge whether Debenhams has been successful in weaning itself and its customers from its traditionally highly promotional high-low pricing strategy.”

In a similar flair, Sophie McCarthy at Conlumino highlighted that “Debenhams has continued with the momentum shown in its last trading update, posting better than expected growth.” “Despite considerable nervousness around profit performance, the retailer reported positive growth of +4.3 percent in pre-tax profits, in part buoyed by the earlier launch of its ‘Spring Spectacular’ event to coincide with February pay-day,” she added.

Finally, and still wary of the results, Kate Calvert from Investec warns that “While management is pleased with its progress towards its strategic priorities, we believe these results confirm our view that any gross margin benefit from lower markdowns will need to be reinvested into the offer. With little profit progression expected over the medium term, we reiterate ‘sell’.”

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