April 18, 2013 / 6:36 AM / 5 years ago

UPDATE 2-Debenhams defends price discounts as profit falls

* H1 pretax profit 120.3 mln stg, down 5 pct

* FY gross margin guidance maintained at flat

* H1 dividend kept at 1 pence

* CEO says promotions a strength, not a weakness

* Shares up as much as 7.7 pct (Adds detail, CEO, analyst comments, shares)

By James Davey

LONDON, April 18 (Reuters) - Britain’s Debenhams defended its strategy of promotional discounts, criticised by analysts as being too aggressive, after it posted an expected 5-percent fall in first-half profit.

Britain’s second largest department store group, whose shares have fallen 15 percent following a profit warning in March, blamed snow in January for a drop in sales that it failed to recover fully in February despite additional promotions and discounts.

But the absence of another profit warning accompanying Thursday’s results in a tough market for UK retailers came as a relief for investors, sending the stock as much as 10 percent higher.

Some analysts believe Debenhams, a mid-market department store group which trails John Lewis by annual sales, risks damaging its brand with aggressive price discounts - a view Chief Executive Michael Sharp disputes.

“I don’t think it does any brand damage at all,” he told reporters.

“It also doesn’t do any damage to our ability to trade or the financial performance of Debenhams. It’s undoubtedly a strength,” he said, adding the firm had relied on promotions for over 30 years to draw in shoppers.

“In a market where customers are seeking value for money, where we know there’s pressure on consumer spending, then it is absolutely right that we emphasize our strengths,” he said.

Debenhams made a pretax profit of 120.3 million pounds ($183.27 million) in the 26 weeks to March 2, in line with guidance issued in the profit warning on March 4 but down from 127.1 million pounds it made in 2011-12.

First-half sales rose 3.5 percent to 1.54 billion pounds. Though sales at stores open more than a year increased 3.1 percent, gross margin fell 20 basis points, reflecting a rise in discounts.

However, Debenhams maintained its guidance for a flat gross margin for the full 2012-13 year.

Sharp declined to comment on current trading, beyond stating that the latest industry market share data, published last week, showed the firm making progress in menswear, womenswear and health and beauty.

“That’s got to be a manifestation that customers are liking our products and however difficult the market is out there, we’re taking more share than our competitors,” he said.


Cantor Fitzgerald analyst Kate Calvert was concerned about trading since the beginning of March, however, and cut her 2012-13 pretax profit forecast by 3 percent to 152 million pounds and her 2013-14 forecast by 4 percent to 158 million pounds.

“Anecdotal feedback is that the industry is having a tough time, given the late start to spring. Consequently, we believe management is trading the business too aggressively,” she said.

Many British retailers are finding the going tough as consumers, whose spending generates about two thirds of UK gross domestic product, fret over job security and a squeeze on incomes.

Last month was also the coldest March since 1962, denting sales of spring/summer clothing and footwear.

Marks & Spencer, Britain’s biggest clothing retailer, last week reported a 3.8 percent decline in fourth-quarter underlying sales of general merchandise.

Official UK data published on Thursday showed retail sales volumes slipped 0.7 percent in March.

Debenhams, which maintained its interim dividend at 1.0 pence a share, also said it was pulling out of Romania, blaming difficult market conditions and taking a 3.8 million pounds write-off.

Shares in the firm were up 8.8 percent at 87.7 pence at 1043 GMT, valuing the business at 1.1 billion pounds. ($1 = 0.6564 British pounds) (Reporting by James Davey; Editing by Kate Holton, Paul Sandle and Clelia Oziel)

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