Debenhams disappoints but poses hopes on online growth

Britain's second largest department store group blamed slowdown in third quarter sales growth Thursday on a volatile trading climate and a tough and cold spring weather. Third-quarter sales fell-short of analysts' forecasts and Debenhams

has also seen forecasts cut after a profit warning in March.

"Any retailer that you speak to will tell you that it's not easy out there ... I think in the context of the market backdrop these are robust results," CEO Michael Sharp told reporters on Thursday. Debenhams (DEB.L) has reported flat sales over the past six months, missing expectations, although cost savings mean its overall performance hit projections.

Sales at stores open at least a year were unchanged in the 16 weeks ended June 22, the London-based retailer said Thursday in a statement. That missed the median estimate of 15 analysts compiled by Bloomberg for a 1.5 percent gain and was a slowdown from growth of 3.1 percent in the first half.

Analyst Jean Roche at Panmure said: “Debenhams has reported trading for the 16 weeks to June 22 which is disappointing relative to consensus.”

However, and showing trust on the retailer’s potential, John Stevenson at Peel Hunt said: “While we gain encouragement from cost savings mitigating the weaker sales performance, we see the shares losing ground in the face of lacklustre sales performance,” pointing out that the underlying market is clearly tough for the department store, and so he's sticking at 'hold' recommendation on the shares.

In the same breath, “Nonetheless, management has moved to contain costs, whilst the group’s push online continues to grow. Furthermore, expansion overseas is on-going, while the company’s share buy-back programme provides a degree of share price support,” commented Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers

Shares in the firm, down 23 percent since the start of the year, were up 1.75 pence at 92.6 pence on Thursday, soon after the release, valuing the business at 1.13 billion pounds. "This is not a high quality update, but we think that the market had been expecting another warning," said Sanjay Vidyarthi, analyst at Espirito Santo Investment Bank.

CEO at Debenhams poses hopes on online growth

The weaker-than-expected performance has nothing but added more pressure on Sharp, who has overseen a decline of more than 20 percent in the stock value this year, highlighted insiders from the City.

Forecasts had been cut after a profit warning in March that was blamed on January snow. Analysts' consensus forecast is now a pretax profit of around 153 million pounds, down from 158.3 million pounds in 2012-13.

Sharp highlighted market share gains in clothing, beauty and home and a 40 percent rise in online sales, saying that was a clear manifestation of the strength of the group's offer.

In line with previous guidance, Debenhams also said gross margin would be flat for the full 2013-14 year.

At this respect, Bowman stressed that “Despite disappointing sales, investors are likely to be breathing a sigh of relief, with no secondary profit warning announced. Unseasonal weather has clearly played its part in the sales miss, another reminder if one were needed as to how vulnerable high street retailers remain to the weather.

“Volatile weather has affected trading patterns and Debenhams has also provided a now standard issue graph of weekly sales volatility. There is no real surprise in this pattern, though this is likely to be below market expectations for the second half (we think two to three per cent like-for-like growth),” corroborated Vidyarthi.

“Management suggests that it has continued to take market share across clothing, beauty and home. Online sales growth remains strong at 40 percent,” concluded the analyst at Espirito Santo.