Debenhams warns on profit after poor Christmas trading

Shares dive by 12 per cent amid warning of tough festive season on high street

Debenhams revealed it suffered a disastrous Christmas as the department store chain issued a shock profit warning, admitting that profits are expected to be £15m lower than previously thought, and down 25 per cent on last year.

The chief executive, Michael Sharp, said an anticipated boost in sales in the final week of Christmas failed to materialise, online sales did not increase as quickly as hoped, and he will scrap plans for a share buyback scheme.

Heavy discounting led to margins falling and extra stock means further markdowns will be needed to clear stock this month and next.

The news sent shares plummeting 10.15p – 12.2 per cent – to 73p, which means the company's share price has now fallen 36 per cent compared with last year.

The profit warning was Debenhams' second in the last 12 months. Mr Sharp blamed the mild autumn and winter weather for poor clothes sales and said the whole high street was feeling the pain as more customers switched to online shopping and those visiting physical stores fell.

However, he denied that sales fell due to revelations last month that suppliers were being forced to give a retrospective discount to Debenhams over the Christmas period. He also refused to say whether or not investors have asked him to sack his chief financial officer Simon Herrick, who is under immense pressure to quit.

He said: "The marketplace has been highly competitive and very promotional, kicked off by Black Friday and Cyber Monday.

"That was perpetrated by footfall on the high street being down on the year, while the un-seasonably warm weather has also affected clothing sales."

The company said sales in the 17 weeks to 28 December were up 0.7 per cent, but profit margins were down by between 80 and 100 basis points. Online sales were up 27 per cent but customers were put off by changes to free home delivery, now only offered to those spending £50 or more rather than £30 previously. This means the business expects pre-tax profits for the six months to March to be around £85m, instead of an expected £110m. Last year profits for the period hit £114.7m.

Debenhams issued another profit warning last year, blaming the snow for supply problems and keeping customers home. Several retailers have complained in recent weeks that the economic recovery is not being felt by shoppers, as inflation continues to rise faster than wages.

Mr Sharp agreed and said lower incomes meant it was important to offer discounts before Christmas.

Analysts and commentators have been critical of Debenhams's discounting in the past, suggesting that customers now expect a reduction and become more unwilling to pay full prices.

However, Mr Sharp defended the discounting as "a strength not a weakness". He added: "Customers like it and recognise it as genuine value for money and it's worked well for us in the past."

House of Fraser, Topshop, Gap and H&M also slashed prices over Christmas, while Marks and Spencer introduced a 30 per cent sale just days before Christmas.

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