Debenhams announcement today that its guidance of full year profits (to August 2019) in line with market expectation no longer being supported by the company leaves the markets view of the company even more in limbo than it was previously in our view.
DEB has announced a new 12month £40m bank facility agreed with certain of its existing Revolving Credit Facility (RCF) lenders and Noteholders and waiver of some existing RCF covenants. This facility with a coupon of LIBOR +5% which can be increased during 2Q calendar 2019 as an incentive to complete a wider re-financing. It has also announced agreement in principle with Li & Fung to develop a strategic sourcing partnership.
Debenhams has reported Group LFL sales down 5.7% (same % change at constant currencies) for the first 18 weeks of the year. Within this, online sales grew by 4.6% implying UK in-store sales declined by nearly 10% LFL on our calculation. Market expectation was for Group LFL to decline by 2-3%. DEB’s UK in-store LFL decline was in our view similar to Next’s and worse than M&S’s Clothing & Home in-store LFL which have calculated at minus 6-7%. So Debenhams’ in-store sales performance was not materi
The fact that the shares have not rebounded materially on well-trailed news that Debenhams has secured cash savings over two years equivalent to its current debt indicates continuing concern over nearterm volatility and reservations that there will be a medium term here.
This was an odd occasion heavily attended for what has become a small company by capitalisation. The sign-up for this store was four years ago and the lease term 25 years (we believe with some break provisions). The applicability of some of what was seen was limited across the broader estate and the management present were sufficiently new in many cases that they will not have been involved in buying or conceiving much of what was presented. The store presentation appeared to be to a high standa
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Further UK market weakness has resulted in another profit downgrade and Debenhams (DEB) moving more overtly into a defensive mode. Our 8/18 PBT forecast (pre-exceptionals) has been reduced by 29% to £34m. The company expects to be able to grow profit from its guided 8/18 level of £35-40m. But there is clearly above average uncertainty attaching to its forecasting because of its record in these matters and macro.
Having sat on the fence as Debenhams has struggled through a very difficult Autumn/Winter sector-wide we now believe there are grounds for a more positive view.
1H Results: PBT £42.2m v consensus £44m (2016/17), PBT guidance reduced to bottom and consensus (£50-61m) v previous range £55-65m (2016/17 £95m), modernisation programme accelerated. Regard this mix as positive against apocalyptic expectation expect share price bounce.
Following the pre-announcement of its Christmas trading we have cut our DEB PBT estimates for 2017/18E, 2018/19E and 2019/20E by 33%, 28% and 28% respectively. We have also cut our DPS estimates for these years by 35%, 25% and 22%.to achieve 2x cover in 2018/19E.
Shareholders would have been hoping for better results, especially after NEXT's positive Christmas trading results yesterday.
Debenhams becomes the first Profit Warning of 2018 guiding 8/18 PBT to £55-65m around 20% below consensus at the mid-point. This highlights the operational gearing here with the main financial variance being a 150bps 1H gross margin decline against previous guidance for Full Year gross margin to fall 25bps. This has resulted from tactical promotion to maintain clean stock and weaker than expected start to the Clearance Sale.
In the first volume in our series on the changing face of the British High Street, we look at retailers.
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