UPDATE: Debenhams Profit To Beat Views, But Remains Cautious

Debenhams PLC (DEB.LN) Tuesday said its annual profits would beat market forecasts, boosted by a pick-up in fourth-quarter sales, but the U.K. clothing and homeware retailer remains cautious on the consumer outlook.

The second-largest department store chain in the U.K. by sales behind Marks & Spencer Group PLC (MKS.LN) said it guides for full-year pretax profit of around GBP150 million, up 20% year-on-year and ahead of market expectations of between GBP145 million and GBP147 million.

"Our profit performance has been pleasing but we believe it is correct to remain cautious about the level of consumer confidence going forward," Chief Executive Rob Templeman said.

Retailers are concerned about the the impact of government austerity measures, including tax hikes and public spending cuts, on discretionary consumer spending this year and the next. U.K. retail sales picked up in August as back-to-school wear boosted sales, but discounting played a part in the improvement.

"Everybody is going to be cautious until we get some clarity about the impact from public savings. (This will continue) for the next twelve months," Templeman said.

Last week, the company said it would cut prices by up to 25% to boost sales and reduce stock, in the latest sign that the industry is concerned about the outlook on consumer trends. Clothing prices are expected to rise against a backdrop of inflationary pressures from foreign currency exchange effects and higher commodity costs, including the rising price of cotton. Cotton futures climbed Monday to new 26-month highs as tight supplies and low stockpiles continue to feed the bullish momentum, underpinned by concerns over crops in China and India.

Templeman said that, while cotton prices have softened since the peak in November last year, the trend is still upwards. But he rejected suggestions that macroeconomic woes will have a major impact on Christmas retailing, saying, "people always want to buy products for Christmas."

At 0728 GMT, Debenhams shares were up two pence, or 3.5%, at 67 pence in a flat London market. "We believe there is sufficient momentum in the business (to) drive double digit growth over the next couple of years despite a subdued consumer backdrop," said Seymour Pierce analyst Kate Calvert, upgrading the stock to buy from hold.

Debenhams said sales from stores open at least a year for the year to Aug. 28 were knocked by around 1.5% as the company continued to reduce floor space allocated to concessions, in favor of its own-brand and designer ranges. Still, sales in the last 10 weeks rose around 2%, the group said.

Gross transaction value increased 9.6% including Magasin du Nord. Excluding the Danish department store, it rose 1.4%. The group said it sees gross margin increasing over 100 basis points in the year excluding the store, higher than its previous guidance of an 80 basis points rise.

Net debt at Aug. 28 is better than the market consensus of GBP530 million, the group said, following refinancing in July.

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

Debenhams (LSE:DEB)
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