It is a sign of just how bad things had got for department store Debenhams (DEB) that the simple fact it had avoided a profit warning was enough for the shares to trade higher early on following its Christmas trading update.
That’s changed now with the shares currently 11.4% lower at 5p, a long-term chart of the company’s share price looking more and more like a ski slope by the day.
Investors are likely reacting to the significant challenges which the company continues to face, not least finding a sustainable way of funding a business which is straining under the load of its net debt position of £286m. Any solution could well involve significant dilution for shareholders.
Like-for-like sales over Christmas were down 3.4% (3.6% in the UK) which was an improvement on the rate of decline seen in the preceding quarter but has apparently been achieved through significant discounting.
‘TACTICAL PROMOTIONAL ACTIVITY’
In the company’s words: ‘The UK trading environment has continued to be volatile, as expected, with clear evidence that our customers have been seeking out promotions.
‘As a result we reinstated some tactical promotional activity in order to be competitive and manage inventory tightly, which will result in some gross margin erosion in the first half.’
‘Tactical promotional activity’ is a posh way of saying it cut prices.
AJ Bell investment director Russ Mould says: ‘This stabilisation in trading, if you can call it that, also raises the likelihood that Debenhams will try to raise money by issuing new shares. It makes reference to bringing in new sources of funding in the trading update, so one could expect news on that front soon.
‘Debenhams may have bought itself some time with the latest trading update, yet you cannot ignore that fact that its business model is less relevant in the modern world of retail.
‘As such, anyone brave enough to pump new money into the company would want a cracker of a discount to the current share price in order to be adequately compensated for the risks they would be taking on.'