23rd Oct 2014 08:51
LONDON (Alliance News) - Department store operator Debenhams PLC Thursday reported a lower pretax profit for its last financial year, but said the efforts it is taking to turn the business round are paying off as operating profit rose in the second half of the year.
Debenhams has suffered for the past few years, hit by tough competition on the UK high street and from online competitors. In the first half of the year, it admitted it had been hard hit by the heavy discounting it had to do to pull shoppers into its stores, and Chief Executive Michael Sharp pledged to do fewer, smaller promotional sales and focus on big events such as its Blue Cross sales.
"We achieved higher full price sales and fewer days on promotion as a result of greater clarity on our promotional calendar resulting in an improved gross margin. We have also made good progress on our work to drive better returns from our space. Developing a more convenient and competitive online fulfilment offer has been a key priority and we enter this year's peak trading period with a much improved range of delivery options," Sharp said in a statement Thursday.
Debenhams has finally put in place a number of new online delivery options, including a later cut off point for next day evening delivery of 10pm, and a free next day click & collect option. Debenhams' click & collect service previously took up to 4 days to arrive in store, far longer than most of its main rivals, including Next PLC and Marks & Spencer Group PLC.
"We've gone from lagging behind to very much up there with the pack," Sharp said, talking about its new delivery options, adding "A lot of other retailers started the multi-channel journey earlier than us. I think it's only Next that offers a later cut off point than us now".
Sharp is hoping to grow its online business to over GBP600 million in sales in the medium-term, from where it currently stands at GBP430.7 million.
Debenhams reported a pretax profit of GBP105.8 million for the 52 weeks to August 30, down from GBP139.0 million a year earlier, as higher sales and distribution costs as well as administrative expenses offset a revenue rise to GBP2.31 billion, from GBP2.28 billion. Its operating profit for the year fell to GBP128.6 million, from GBP155.4 million.
However, its operating profit in the second half of the year was up 2.9% on the same period a year earlier, compared with the 22.9% decline it reported in the first half of the year, showing the impact of its turnaround plan, the CEO said. Its gross margin was down 100 basis points in the first half, but was up 10 basis points in the second half, leaving its overall gross margin for the year down 60 basis points.
Debenhams started discounting heavily in the first part of the year as an attempt to pull shoppers into its stores and online. It disappointing first half performance was caused by a combination of factors besides heavy discounting, including below expectation clothing sales, higher markdowns, and over ambitious sales target.
To counteract a drop in first-half profit and weak margins, Chief Executive Michael Sharp pledged to do fewer small promotional sales, and focus just on its bigger events such as its 'Blue Cross' sale event, in hope of selling more full-priced goods.
At the time, it said it would be willing to tolerate market share losses for an improvement in cash gross profit, with the aim to improve margins through lower markdown in the medium term.
The retailer said Thursday that the refocusing of its promotional strategy had resulted in a 10.6% increase in own brand full price sell-through in the second half. It is also encouraged by the early signs of its efforts to optimise space in its stores through concessions with the likes of Sports Direct, Costa Coffee, Monsoon and Mothercare.
"We said we wanted to improve our sportswear offering and Sports Direct are the kings of sportswear in the UK. It's too early to comment on concessions as they need to trade through Christmas," said Sharp.
Sharp said the retailer is in talks with other partners about opening up concessions within its larger stores, but would not say any more on that.
It also said its more conservative sales targets and tighter buying levels resulted in a 5.3% reduction in like-for-like closing stock, another issue it reported previously.
"We didn't trading well in Autumn/Winter, which we have addressed, and it was because we weren't competitive enough. We have tightened up stock, which we did in the first half of the year, and planned the business prudentially," said Sharp.
Debenhams also said it is making progress with improving its online offering and distribution. Online sales rose 17.6% during the year, representing 15.3% of group sales, while online earnings before, interest, tax, depreciation and amortisation increased 20.5%.
Overall, Debenhams' like-for-like sales rose 1.0% in the financial year as a whole, with gross transaction value up 1.7% to GBP2.82 billion.
It maintained its full year dividend of 3.4 pence, after saying it will pay a final dividend of 2.4 pence.
However, the company also remains cautious about its outlook.
"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 and will continue to plan prudently," CEO Sharp said.
"It is early days in the run up to Christmas, but we have done everything we said we were going to do, in terms of the new delivery options. We are now faster and more competitive, so we are ready for Christmas. I believe it will be as competitive as it always is," Sharp told journalists.
Management did not comment on current trading, or a potential hold back in sales due to the warmer than usual weather throughout September and October, an issue other retailers have flagged.
"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 first-half sales," said Investec analyst Kate Calvert in a note, "Superficially, the shares are not expensive, but we see little potential for medium-term profit recovery given the structural pressures from online and investment needed in the offer."
Debenhams plans to turn itself into a better multi-channel retailer have been ongoing for the last three years.
"We will never get to a point where we will be finished, as the [retail] sector is consistently moving and evolving," said Sharp.
The retailer's stock was up 1.4% at 63.65 pence Thursday morning, one of the biggest gainers on the FTSE 250.
By Steve McGrath and Rowena Harris-Doughty; [email protected]; @stevemcgrath1; [email protected]; @rharrisdoughty
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