Debenhams to change strategy after profit decline

Debenhams' plans on cutting down on promotional offers, improving its online offering and strengthening its product range as the British department store group aims to turnaround its declined profit margins following the publication of its half year results for the 26 weeks to 1 March, 2014.

The department store group issued its second profit warning in less than a year last December, as the first half of 2014 provided to be a difficult trading period. On Tuesday, Debenhams revealed that due to lower than expected sales in the UK group EBITDA decreased by 14.4 percent and operating profit was 22.9 percent lower than last year.

“The UK market was challenging and competitive throughout the first half and our performance was affected in the main by three factors. First, clothing sales were below expectations, largely as a result of sales targets based on a strong performance last year. Secondly, the promotional environment was more intense than last year, which diluted the impact of our promotions. Thirdly, convenience became a much more important driver of customer behaviour in the crucial pre-Christmas period than in previous years,” commented Debenhams in its half year results.

Debenhams to introduce series of changes to improve sales

Michael Sharp, chief executive told reporters on Tuesday that a number of changes would take place to help turnaround profits at Debenhams and improve its business, but erred on the side of caution on the consumer recovery in the UK, where the department store group earns over four fifths of its 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," said Sharp to Reuters reporters. Debenhams aims on focusing on the four pillars of its company strategy to achieve its goal of becoming a leading international, multi-channel brand.

The department group acknowledges that its promotions are “a traditional strength of Debenhams”, but blames the wave of discounting used by other UK retailers during the Christmas period as part of the reason its impact was 'diluted'. “We are therefore refocusing our promotional strategy which will see more clearly defined promotional periods in the trading calender with fewer days on promotion,” revealed the department store group.

However, Stephen Springham, senior retail analyst at Planet Retail, points out: “This may be easier said than done as the cycle is a hard one to break.” He claims “most obvious manifestation of malaise [for Debenhams] is the level of in-store promotional activity,” and notes that they “are now at the point of overkill – shoppers are suffering from promotional fatigue, footfall is gravitating toward competitors with a much clearer pricing message (such as Next) and volumes are under pressure.”

“The H1 figures were undeniably poor, but Debenhams is not yet a retailer in crisis. But any turnaround is likely to be a gradual rather rapid one and the issues facing the business run deep. The shortcomings lie less in the merchandise itself, more in its pricing architecture. The process of re-defining the promotional strategy will be a drawn-out one – a retailer can't lean so heavily on promotions over a period of time and there will be an inevitable period of 'cold turkey',” commented Springham.

Debenhams has indicated that any changes to its strategies will most likely take some time to take effect and added that its expected its gross margin for the year to August, 2014 to drop by 50-70 points, which has led to a number of analysts downgrading their full-year profit forecast for the department store group.

Other analysts believe that the department stores poor online offering, over dependence on discounting and unknown home-brand collections have affected its image. Although the department store group trades out of 158 stores in the country in comparison to competitor John Lewis, who operates out of 41 stores, Debenhams is still lagging behind in both profits and sales.

In order to better compete with its rivals, the department store chain aims to offer a “more competitive range of premium delivery options” over the next six months, in time for Christmas. Debenhams will introduce next day Click & Collect and extend the cut-off for next day delivery to home to 10 pm, as its Click & Collect orders accounted for 24 percent of online sales during its first half year, compared to 7 percent for the same period last year.

“Overdue, better late than never,” commented Springham on Debenhams decisions. “Perhaps more surprisingly, Sharp also implied that it was lagging behind its competitors in the multi-channel arena and that this was a further drag on performance. He acknowledged, belatedly, that convenience was an important driver of customer behaviour pre-Christmas and that this “favoured retailers with a better developed multi-channel model” than Debenhams (by implication, both John Lewis and House of Fraser).”