Department store Debenhams (DEB) cheapens 7.8% to 69.2p as its latest update highlights a weaker-than-expected Christmas and disappoints on gross margin guidance. Attempting to wean itself off discounts, the multi-channel retailer concedes warm autumn weather had indeed necessitated heavy clothing markdowns.

Web chart - Debenhams - Jan 15

The British heritage brand's update, covering the 19 weeks to 10 January, highlights a 0.8% softening in like-for-like sales, below analysts' expectations of very modest growth. Debenhams wasn't alone in being hit by the balmy conditions which forced retailers including N Brown (BWNG), Next (NXT) and SuperGroup (SGP) to cough up profit warnings.

So the real disappointment surrounds the news gross margin for the year will increase at the lower end of guidance of expansion of between 10 and 40 basis points. This reflects a greater-than-anticipated level of clothing markdowns at Debenhams, which entered the Autumn/Winter season with a stated strategy to be less promotional. Also behind the margin guidance gloom is a strong performance from lower margin beauty products over the peak selling season.

Setting these negatives aside, the update does contain a number of positives. The British brand performed well over the four trading weeks to 10 January, with like-for-like sales up 4.9% with a boost from gifting products. Over the same period, online sales grew 28.9% as Debenhams avoided the delivery problems that hurt Marks & Spencer (MKS). Furthermore, record group sales were racked up in the 7 days before Christmas, while web-based sales rocketed up 125% on Black Friday.

Debenhams, continuing to expand internationally, also highlights good progress with concession trials designed to extend its offering and 'improve the return on space'. These include trials with Costa Coffee, Mike Ashley's Sports Direct (SPD), Mothercare (MTC) and Monsoon.

Analyst reaction to the update is mixed. N+1 Singer believes 'today's update offers encouragement in terms of the revised policies and forecasts are unchanged as a slightly weaker margin is offset by slightly better cost guidance. With the key risk period behind us, and after today's fall of 8%, we revert to buy. Our price target remains at 75p but could rise later in 2015.'

Less enthused is Investec Securities, which nudges down its full-year profit forecast and downgrades the department store from 'hold' to 'sell'. The broker writes: 'While it is encouraging that management stuck to its new trading stance with ten fewer days on promotion, we continue to believe that Debenhams is strategically challenged and needs to reinvest further gross margin opportunity back into the offer. While the valuation is undemanding, we see little potential for a medium term profit recovery.'

Issue Date: 13 Jan 2015