UPDATE:Debenhams Dips On Latest Trading;First Half Tops Views

Debenhams PLC (DEB.LN) Tuesday posted forecast-beating first-half profit on modestly higher sales and supported by higher margins, but current trading disappointed and its shares fell.

The U.K.'s second-largest department store behind Marks & Spencer Group PLC (MKS.LN) also said it expects the trading environment to be "broadly neutral" in the second half.

Chief Executive Rob Templeman said that although he doesn't expect the consumer environment to worsen this year, he forecast "headwinds" after the U.K. general election May 6, with tax hikes likely to dent consumer confidence.

He also said he supports the Conservative Party's plan to reverse the ruling Labour government's proposed 1% rise in National Insurance contributions, due to be introduced next year.

Templeman declined to give full-year pretax profit guidance or commit to a dividend forecast.

Meanwhile, he said there had been no talks with Stockmann department stores, following a report in the Independent newspaper that Debenhams would make a play for the Finnish chain.

At 0917 GMT, Debenhams shares were down 1.8%, or 1 penny, at 77p, valuing the company at GBP997 million, amid a 0.4% fall in the FTSE 250 mid-cap index.

Analysts said the first-half numbers will prompt profit upgrades, but current trading was little better than flat: for the 31 weeks to April 3, same-store sales were up just 0.3%, although gross transaction value rose 8.6%..

Those figures don't compare well with "buoyant double-digit same-store sales growth noises" from high-street peers John Lewis Partnership PLC (LEJ.YY) and Marks & Spencer in March, said Arden Partners analyst Nick Bubb, who has an add rating on the stock.

The group's performance also compares unfavourably with the latest data from the British Retail Consortium, which earlier Tuesday said U.K. same-store retail sales rose 4.4% in March from a year earlier, accelerating February's 2.2% gain.

For the 26 weeks to Feb. 27, Debenham's profit before tax and exceptional items rose 18.6% to GBP123.6 million from GBP104.2 million a year earlier. The company guided for first-half pretax profit to be in line with market consensus forecasts of between GBP115 million and GBP116 million.

Net profit was GBP80.1 million, down from GBP81.2 million last time.

As reported last month, the company said first-half sales from stores open a year rose 0.3%, ahead of consensus expectations for flat sales, despite the disruption of extreme winter weather and the impact of lower sales densities resulting from the company's strategy to move space away from concessions to its own-brand and designer range. The space changes will hit same-store sales by about 1.5% in the fiscal year, the group said.

The company said trading conditions across the retail sector were "broadly stable" as consumers' concerns over unemployment and government finances were countered by low interest rates and higher disposable income.

Like its department store peers, including House of Fraser PLC (HOF-LN) and John Lewis Partnership, Debenhams is growing its more lucrative own-brand or wholly owned house labels in fashion and homeware, which has hit sales but has also helped improve margin and profit.

The group, which has 158 stores in the U.K. and Ireland, and more than 50 franchised outlets overseas, said first-half gross margin, including the acquisition of Danish department store chain Magasin du Nord, rose 70 basis points. Excluding the acquisition, the margin rose by 140 basis points.

It forecasts a 80 basis points rise in margin for the fiscal year, excluding Magasin, higher than its previous forecast of a 50 to 60 basis points increase.

Net debt fell to GBP511.5 million, down from GBP927.2 million from a year ago, in line with the company's forecast for a figure "slightly better" than GBP525 million.

By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

Debenhams (LSE:DEB)
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