Debenhams job cuts and store closures likely after disappointing sales

Debenhams is to cut jobs and consider more store closures after a poor festive trading period led to a major profits warning.

Shares in the department store dropped by 15% to 30p, the lowest level since the 2008 financial crisis, after it warned that sales of seasonal gifts and clothing had fallen despite heavy discounting.

Sales fell 2.6% at Debenhams’ established UK stores, open for more than a year, in the 17 weeks to 30 December.

In a gloomy statement on its Christmas trading performance, issued a week earlier than anticipated, Debenhams said profits would be about 30% lower than expected and warned that the current UK trading environment was “volatile and highly competitive”. Profits for the full year were now expected to be between £55m and £65m – sharply below City expectations of £83m.

The profits warning reignited fears of a grim season on the high street after a more upbeat than anticipated announcement from rival chain Next earlier in the week.

Shares in retailers including Marks & Spencer and Sports Direct fell after rising following the better than expected Next figures on Wednesday. Mothercare, Laura Ashley and Mulberry shares were also dragged down on Thursday.

Mike Ashley’s Sports Direct was doubly under scrutiny as it holds a 21% stake in Debenhams and has a number of outlets within the department store chain’s shops. The fall in Debenhams’ share price may prompt speculation of a takeover attempt by Ashley, as part of efforts to move his retail group away from pile-it-high sports gear to more premium clothing lines.

New data published on Friday indicates that high street sales fell 2.3% in December, the fifth consecutive year of decline. High street fashion sales were particularly poor, down 3.8% in December to mark the third month of decline according to the latest monthly survey of mid-sized retail chains by advisory firm BDO.

In contrast, online sales rose 21.4% with the week up to Christmas Eve recording a near 40% surge as shoppers gain confidence in last minute deliveries, according to BDO.

The BDO, Next and Debenhams figures indicate that retailers without a strong online service and a large presence in fading shopping malls and high streets are facing serious difficulties.

Debenhams is closing two stores and considering up to eight more as part of chief executive Sergio Bucher’s recovery plan announced earlier this year. Debenhams said it continued to keep its estate under review.

Other retailers are also consolidating their store estate including Marks & Spencer and Toys R Us, which is set to close at least 26 stores under an insolvency process finalised before Christmas.

American fashion chain Forever 21 is understood to be closing its Dublin and Amsterdam outlets and reviewing its British estate after UK losses ballooned by nearly 75% to £29m in 2016, according to accounts filed at Companies House this week.

Bucher said Debenhams was accelerating plans to cut jobs by simplifying its management structures. It will also be stepping up business rates reviews as part of aims to save an extra £10m in costs this year.

Bucher said he had faith in his turnaround plan and remained “optimistic about the future of Debenhams”, saying the company had increased sales of beauty and food but had failed to make its seasonal gifts innovative or premium enough to fend off heavy competition and discounting.

He said Debenhams had held market share in clothing but the amount shoppers are spending had shrunk amid a warm start to the autumn/winter season, which had led to more discounting than last year.

“The market has been challenging and particularly promotional in some of our key seasonal categories and we have responded in order to remain competitive for our customers, which has impacted our profit performance,” Bucher said.

He said the first week of the post-Christmas sale had been “below expectations” despite further price cuts, particularly on gifts.

Richard Chamberlain, an analyst at RBC Capital Markets, said Debenhams’ problems were not only the result of challenging market conditions and a tough post-Christmas sale. “In addition we think Debenhams has suffered from having a sub-optimal clothing and gifts offer and from being overly reliant on promotional activity to drive footfall and online spend,” he said.

Kate Calvert, an analyst at Investec, said Debenhams faced structural pressures from the shift to online retail which made it difficult to see profits increasing beyond next year. “Debenhams is still a challenged business with too inflexible a cost base and too many unanswered questions over execution and strategy,” she said.

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