So…where will the recovery road take Debenhams?

ANALYSIS_ After feeling the pain of an expected yet still sharp fall in annual underlying profit, Britain's No.2 department store chain confides that a better usage of its store space and less promotions should help it improve profitability this financial year.

Chief Executive Officer Michael Sharp said Thursday that management has set more “prudent” sales targets ahead of the holiday sales period after “overambitious” goals earlier in the year forced Debenhams to discount heavily.

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nderlaying pre-tax profit fell 21 percent to 110.3 million pounds in the year to August, 30, nevertheless in line with analysts' expectations. Sharp said he was comfortable with forecasts for profit to grow by about 4.5 percent over the current financial year, but said squeezed consumers made for a challenging market.

Better usage of underperforming stores and less promotions for Debenhams

"Customers tell us that although they are encouraged by economic improvements this has yet to translate into higher disposable income and the market remains tough. We therefore remain cautious about the outlook," he said.

According to the company's management, about 10 percent of its space in its around 160 UK stores were "underperforming".

Kate Calvert from Investec said in this regard that “The full-year 2014 results were as expected. The profit and loss structure reflected reduced promotional activity, in line with management’s strategy.”

With regards to what Debenhams is up to at the present being, Calvert highlighted that “There was no comment on current trading, which probably means there are enough mark-down opportunities and benefits from other management actions to offset the inevitable weather effect on H1 sales.”

Aimed to drastically tackle falling profits and a lesser market share, Debenhams slashed prices by as much as 50 percent before Christmas last year, recalled Bloomberg. Fashion accounts for about half of Debenhams’ sales with beauty products, jewelery and homewares making up much of the rest.

“Debenhams has embarked on a revised strategy of less promotions and discounting, which we believe to be the only way to recover profit margins,” N+1 Singer Ltd analyst Matthew McEachran said in a note to investors. “This strategy has clear medium-term potential albeit short-term risk if customers perceive the offer to have less value,” he concluded.

As well as their British high street champions such as Next or N Brown, Debenhams has found itself badly affected by the unseasonably warm weather that led to a 25 percent drib in profit in the first half of its last financial year.

“Although outside this reporting period (which relates to the 12 months to the end of August), Debenhams will not be immune to the impact of this desperately slow start to the Autumn/Winter season. This will put pressure on its move to a full-price model, but should not totally undermine its ambitions. With sales likely to be behind schedule, a major test of nerve awaits over the next couple of months,” commented the results Stephen Springham, Senior Retail Analyst, Planet Retail.

Looking ahead, the department store operator remains positive and said it had a better second half, having reduced promotions and improved delivery options for its online business.

In a similar vein, Debenhams saw "encouraging" signs from trialling concessions from companies including Sports Direct and Whitbread's Costa Coffee in an attempt to use its store space more effectively.

On the back of the news, Debenhams shares, which had shredded 44 percent over the last 12 months, gained nearly 5 percent to 65.85 pence in early trading in London on Thursday. "In our view we could see some relief this morning given the gross margin outlook and low multiple at which Debenhams trades versus the sector," JP Morgan analysts said in a note.

Angela González Rodríguez