Debenhams (LSE: DEB) 1H17 Results: Continued Lackluster Sales and Profitability Erosion

KEY POINTS

  • UK-based department store chain Debenhams reported gross transaction value sales of £1,677 million for 1H17, up 2.9% year over year, but below the consensus estimate of £1,681 million.
  • The company’s 1H17 statutory revenues came in at £1,351 million, up 1.8% year over year for the 26 weeks ended March 4, 2017. Group comparable store sales increased by 0.1% year over year on a constant currency basis. UK reported revenues were down 0.3% and UK comparable store sales declined by 1.3%.
  • The company’s gross margin contracted by 30 basis points in 1H17, to 14.2%, and underlying EPS decreased by 6.5% year over year.
  • For FY17, the company lowered its gross margin guidance to (25) basis points from (25)–25 basis points previously and raised its total cost increase forecast to 3%–4% from 2%–4% previously. The company did not provide sales guidance.

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1H17 Results

Debenhams reported 1H17 statutory revenues of £1,351 million, up 1.8% year over year. Group comparable store sales increased by 0.1% year over year on a constant currency basis. Same-store sales were mainly driven by online sales growth of 14.6%.

UK reported revenues were down 0.3%, while international revenues increased by 12.6%. UK comparable store sales declined by 1.3% and international comps declined by 0.3% in 1H17.

The company’s gross margin contracted by 30 basis points, to 14.2%, as markdown improvements were offset by higher sales from lower-margin categories such as beauty. The operating margin contracted by 60 basis points, to 6.9%, and underlying EPS declined by 6.5% year over year, to 5.8p.

 

Outlook

For FY17, Debenhams lowered its gross margin guidance to (25) basis points from (25)–25 basis points previously, and raised its total cost increase forecast to 3%–4% from 2%–4% previously. The company did not provide sales guidance.

Debenhams is considering closing 10 UK stores and exiting some international markets in the next five years. The company will also make strategic investments to become more of a “social” shopping destination and become more “digitally driven.” To implement its strategic changes, the company will increase annual capital expenditures to £150 million in the 2018–2020 period, up from the current annual level of £130 million.

For FY17, the consensus estimate for gross transaction value sales stands at £2,961 million, implying year-over-year growth of 0.8%. Consensus expects operating profit of £117 million, implying a year-over-year decline of 10.5%, and EPS of 7p, implying a year-over-year decline of 12.5%.