Struggling department store operator Debenhams’ (DEB) shares are down another 8.6% at just 21.3p. S dire set of half year results, yet another round of downgrades and a material dividend cut dent investors’ confidence in CEO Sergio Bucher’s (pictured below) turnaround plan.

One year after launching his ‘Debenhams Redesigned’ recovery strategy, Bucher must be wondering he’s let himself in for by taking on the job.

Doing what he can to tackle excess floor space, drive the digital business, hold share in a tough fashion market and grow the beauty and food categories, Bucher’s hands are tied in many ways by the retailer’s alarming rent bill.

CEO - Sergio Bucher

PROFITS & DIVIDENDS HALVED

Readers can pick through the finer details of results for the half to 3 March here. ‘Highlights’, ahem, include a 2.2% like-for-like sales drop, trading hit by a disappointing Christmas followed by the UK’s big freeze, but principally volatile and competitive markets and the structural challenges facing the department store model.

Debenhams’ profit before tax slumped 52% to a worse than feared £42.2m, at the lower end of expectations slashed following a profit warning in January. Forced to deliver further discounts to stay competitive (to the detriment of margins), Debenhams’ reputation as a serial discounter remains deserved.

And with debt rising, the dividend is cut more than 50% to 0.5p. Debenhams also issues a mild profit warning, the board now expecting full year profit before tax to be at the lower end of the current £50m-to-£61m range.

In a further blow to the business, finance director Matt Smith is jumping ship and joining Selfridges.

THE EXPERTS’ VIEW

Russ Mould, AJ Bell Investment Director, explains: ‘Debenhams leases average 18 years in length and this does limit the company’s room for manoeuvre and it remains to be seen how much of a dent that any future negotiations with landlords will make in the £4.5bn lease commitments disclosed in the 2017 annual report and accounts.

'This is a considerable burden on the company’s profits and cash flow and one casualty has been the dividend payment where the old adage “if a yield looks too good to true, then it usually is” has claimed its latest victim.’

Mould continues: ‘While 12 months is not a fair time period by which to judge any strategy, it is clear that a combination of Debenhams’ historic reliance on its ‘Blue Cross’ price promotions, excess floor space and a web offering that needs more work are combining to confound the Bucher plan.

Bury St Edmunds,  - June 6, 2013: Department store offering womens, mens and childrens clothes, shoes, furniture and gifts in Suffolk, United Kingdom

MILD PROFIT WARNING

'The combination of weak sales and lower margins means Mr Bucher now expects pre-tax profit to come in toward the bottom end of the consensus forecast range of £50m to £61m, which suggests a mild profit warning, given prior management guidance of a £55m to £65m range,' adds Mould.

'This latest drop in annual profits will only add to a grim sequence of declines which makes it clear just how serious Debenhams’ competitive position really is.'

Broker Liberum Capital adds: ‘Revenue visibility is low due to the high operational gearing. Debenhams is investing just to stand still and is acutely exposed to the ongoing structural challenges in the market. We reiterate our sell recommendation and reduce our target price to 20p (from 25p).'


Issue Date: 19 Apr 2018