Department store operator Debenhams (DEB) has rallied 9% to 87.7p as investors expressed relief that the retailer's half-year figures contained no further negative surprises. On the back of last month's profit warning (4 Mar), investors' focus returned to firm evidence of market share gains and some impressive online growth rates.


Interim figures to 2 March were in line with the very specific guidance given at the time of Debenhams' weather-related profits warning. Prompted by disruption to the UK business by heavy January snowfall and margin-crimping promotions required to shift stock in February, this was Debenhams' second earnings alert of the year to date following earlier margin disappointment flagged not long after Christmas (8 Jan).


Making the bulk of its profits in the seasonally-stronger first half, the £1 billion cap reported a 5.4% decline in taxable profits to £120.3 million despite 3.1% growth in like-for-like sales for the half.


The root of the problem was a 20 basis point weakening in gross margin which reflected the need for discounting in a promotional market in which consumers continue to feel the squeeze. In line with expectations, cash generative Debenhams held the interim dividend at 1p, while a £10 million increase in net debt to £322 million was in line with market consensus and failed to worry the market.


Investors took heart from a statement confirming the British multichannel brand, whose products span menswear and womenswear as well as premium health and beauty products, has healthy sales momentum at its heels. Debenhams reported market share gains in clothing and non-clothing product categories and also highlighted strong multi-channel growth. Online sales skipped 46% higher to almost £195 million and now speak for 12.7% of the group's top line.


Stockbroker Panmure Gordon, with a 'hold' rating and 88p price target, says there is a higher level of risks to forecasts given two profit warnings and is sticking with its forecast of a 3.1% drop in profit before tax to £153.5 million for the year to the end of August.


The broker notes that Debenhams 'continues to guide FY2013E gross margins as flat, from -20bps in H1: given that we continue to see what we would consider to be above average levels of discounting on the high street, with Debenhams leading the pack, we think that this could prove to be a tall order.'


Investec Securities' Bethany Hocking has estimates below consensus. The analyst, with a 'buy' rating and 90p price target for Debenhams, points out 'this remains a high risk stock'. She is looking for full-year profits of £150.5 million, down from £158.3 million last year.


Issue Date: 18 Apr 2013