UK Edition
Debenhams faces challenging year amid flagging sales for retailers
Debenhams’ shares were pulled down on Wednesday following Next’s less-than-positive trading update. The reaction suggests there is an element of contagion in the market and hints at a gloomy post-Christmas period on the high street.
Some of this can be attributed to uncertainty caused by the European Union referendum, but UK retail is generally having a tough time. Chains are having to get used to trading in stores and online, to keep up with changing consumer habits, which means existing systems are having to be overhauled at the expense of margins. The weakness in sterling only adds to this.
A Deutsche Bank note published last week suggested that 2017 is likely to be a more challenging year for European retailers as demand softens.
Not all retailers will struggle of course – B&M Bargains’ Christmas sales soared to record highs thanks to demand for cheap Christmas decorations, showing there is life out there.
But Debenhams is likely to have found things tough as demand for clothing falls and costs rise.
Changes afoot
Debenhams needs to automate its distribution network, which is due to start next year and be completed by 2020, before it can start to reduce the cost of picking its goods to match its competitors. The cost of implementing these changes will mean it is unlikely to see any material benefits until after this work is complete, hitting margins.
New boss Sergio Bucher, a former Amazon vice-president, is expected to prioritise a push into overseas markets in order to boost flagging UK sales. Last year, the company reported a 7pc slide in pre-tax profits to £105.8m, while revenue was largely flat.
The company is also facing significant lease exposure for its properties, which will hit in 2020.
Despite efforts to reduce the amount of discounting, analysts suggest that cut-price goods still make up around half of its sales by value. Full price sales are now underperforming discount sales for the first time since 2014. In order to really see growth, this has to change.
Creeping competition
Despite Debenhams move away from the difficult fashion market, it is yet to make significant inroads in lucrative areas such as beauty in the face of stiff competition. If Marks & Spencer, in particular, recovers this year then Debenhams stands to lose even more of its dwindling market share.
There are plenty of other high street names reporting this week, including Marks & Spencer, Dunelm and ASOS, plus Tesco, Sainsbury’s and Morrisons, so it will be interesting to see how the Christmas trading period has played out across the board.
We tipped Debenhams for a sell rating back in June, and the position doesn’t seem to have changed. Sell.