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Debenhams to cut back promotions after profit drop

People walk past Debenhams department store on Oxford Street, in central London, January 10th 2011. REUTERS/Ki Price
People walk past Debenhams department store on Oxford Street, in central London, January 10th 2011. REUTERS/Ki Price

By Neil Maidment

LONDON (Reuters) - Britain's No.2 department store operator, Debenhams , said it would cut back on criticized promotions, improve its online business and boost ranges with retailer tie-ups to try to reverse a slide in profits.

The firm has endured a tough 12 months, issuing its second profit warning in less than a year in December and losing its finance chief after a long-held strategy of slashing prices failed to boost its crucial Christmas sales.

Chief Executive Michael Sharp told reporters on Tuesday a raft of accelerated changes would improve business, although he remained cautious on the strength of a consumer recovery in the UK, where it makes more than four fifths of sales.

"Customers haven't fallen out of love with Debenhams. They still love the brand. The product proposition is still very strong, and that's where we'll concentrate," Sharp said.

Debenhams shares, which have fallen 27 percent from six months ago, were up 5 percent to 81.50 pence at 0707 ET.

Signaling the changes would take time to work, Debenhams said its gross margin for the year to August would fall by 50-70 basis points. Investec analyst Kate Calvert downgraded her full-year profit forecast by 4 percent to 110.2 million pounds.

"We are unconvinced there is a quick fix and believe the investment needed will hold back profits, though we can see a small bounce in FY15 profits from lower markdown," said Calvert, who rates Debenhams a "sell".

Across Europe, retailers are battling to attract shoppers as disposable incomes are squeezed by subdued wage growth and austerity measures.

In March alone, UK retailers slashed prices at the fastest rate since 2006. Some analysts say Debenhams has struggled because of a weaker online offering, less popular own-brand ranges and a reliance on discounts that has damaged its image.

Despite having 158 UK stores against the 41 run by John Lewis, Debenhams trails its rival in both sales and profits.

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It blamed the poor Christmas on lower than expected clothing sales, fiercer industry promotions that weakened the impact of discounts and a multi-channel offering that lagged rivals.

The hit to profit margins spread into January and February as the firm kept prices down to shift stock. Pretax profit for the 26 weeks to March 1 fell 25 percent to 85.2 million pounds ($142.58 million).

That was in line with guidance given in its December 31 warning but well below the 112 million pounds analysts had forecast prior to the warning. Group underlying sales rose 1.5 percent.

Debenhams said that by Christmas it would introduce a next-day click and collect service and extend the cut off for next-day deliveries to become more convenient for shoppers.

It will strengthen its mobile platform, ensure that all of its UK stores have at least one cafe or restaurant within a year, and will also rethink its promotional offers.

"We are conscious of the need to avoid promotional fatigue among customers and so you'll see us move to more defined promotional periods and fewer promotions overall," Sharp said.

He added that, with 10 percent of space in its UK stores effectively redundant, it was in talks with retailers about tie-ups that could see Debenhams offer new products and services. The firm has been looking at such a deal with Sports Direct for the past few months but gave no update on Tuesday.

($1 = 0.5976 British Pounds)

(Editing by Kate Holton and Tom Pfeiffer)

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