Unloved department store Debenhams (DEB) rallies 3.4% to 55.5p on better-than-expected full year results, underlying pre-tax profits up 0.5% to £114.1m on mildly positive like-for-like sales growth.
Investors breathe a sigh of relief as the British brand, where former Amazon (AMZN:NDQ) executive Sergio Bucher (pictured below) took over as CEO earlier this month, says it maintained market share in clothing, referencing the latest Kantar data.
Debenhams also continued to re-balance its business away from fashion, seeing good growth in beauty and gifting lines as well as in casual dining sales.
'As well as upgrading service and introducing a new menu into our own bought restaurants, we have added choice through partnerships with a number of third parties, whose brands score highly with our target customers,' says Debenhams. 'Alongside Costa Coffee, Patisserie Valerie, Chi Kitchen and Insomnia we have launched Franco Manca in Westfield White City and James Martin Kitchen opens in Lakeside shortly.'
Shares concedes there are some grounds for optimism within today's results announcement. Group like-for-likes are up 0.7% in constant currency and following good cash generation, net debt reduced by almost £41m to £279m; there's an improved dividend of 3.425p (2015: 3.4p) too.
Chaired by retail grandee Sir Ian Cheshire, Debenhams' planned growth in non-clothing categories - beauty, gift, swimwear and food - helped mitigate the impact of a UK clothing market which turned more volatile and promotional in the second half of the year. Positive trends in mobile drove online sales up 9.3% to speak for 14.7% of the overall top line.
Bucher is set to unveil his strategy for Debenhams, a likely beneficiary of BHS closing space, next Spring, though he most certainly has his work cut out as the department store model remains structurally challenged.
Debenhams is having to contend with the new National Living Wage and the retailer has yet to wean itself off discounts. Gross margins declined by 10 basis points last year, a worse than expected outcome as shoppers shunned spend on new garments, while margins will also be squeezed as weaker sterling pushes up costs.
Well-followed retail analyst Freddie George says it is too early to buy the stock, trading on a grudging 8.5 times the 6.5p of earnings forecast by the Cantor Fitzgerald Europe sage for the new financial year.
'We remain concerned, that the department stores are capital intensive and need to be furbished to a higher standard to attract shoppers,' points out George, with a 'hold' rating and 55p price target. 'In addition, the company has significant leasing liabilities, a pension deficit, which will have been impacted by the recent decline in interest rates and net debt still forecast at £260m at end of August 2017.'
