INTERVIEW: Debenhams CEO Expects VAT Rise, Higher Prices

The Chief Executive of U.K. clothing and homeware retailer Debenhams PLC (DEB.LN) said Friday he expects the U.K. government to raise value-added-tax (VAT) and that shoppers can expect to see prices rise as negative currency effects and commodity cost increases hit the industry.

In an interview with Dow Jones Newswires, Rob Templeman said: "We are planning on the assumption that VAT is going to rise. We are looking for clarity."

Economists believe the coalition government will raise VAT to 20% from 17.5% in its June 22 emergency budget to rein in borrowing. Templeman said he doesn't believe VAT will be extended to new areas, like childrenswear.

"Forex and commodity headwinds are coming and driving inflation. It can't be possible that these will not be passed on to the consumer," Templeman said, signaling that prices, excluding the effect of higher VAT, could rise as much as 2% to 3% by the autumn.

Templeman said the group--the U.K.'s second-largest department store behind Marks & Spencer Group PLC (MKS.LN)--will focus on "self-help" levers this year, including store refurbishments, store openings and a continued shift to higher-margin products.

The CEO also said the group's GBP12.3 million acquisition of Danish department store chain Magasin du Nord could become the "springboard" for future international expansion, but that no concrete plans are active.

"We are always on the lookout for opportunities. But at the moment we are not talking to anyone. There is no rush."

In April, Debenhams reported stronger-than-expected first-half profit on modestly higher sales for the fiscal first half, but analysts said its sales figures signaled the chain is lagging behind rival chains in reviving revenue.

Templeman said Friday that improving top-line growth is a focus for the group this year.

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.

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.

Debenhams sales were boosted by house brands, including Principles, and its designer lines such as John Rocha, Jasper Conran and FrostFrench. It also said it increased its market share in childrenswear, menswear and homeware.

Like its department store peers, including House of Fraser PLC 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 Magasin du Nord, rose 70 basis points, supported by own-brand sales and stock control.

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

Debenhams (LSE:DEB)
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