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Debenhams warns on VAT as profits soar

Store chain sees strong demand for its own ranges

Debenhams has voiced its fears over the impact a rise in VAT would have on the high street, as the department store boasted a 12 per cent surge in first-half profits.

Michael Sharp, its deputy chief executive, singled out an increase in VAT as the retailer's main concern among the fiscal measures the next government may introduce after the election to reduce the public sector deficit.

"The big one is around will anyone stick up VAT. That is one we would like clarity on as soon as possible. We would not want an increase in VAT in a fragile market – it would not be helpful," he said. He added: "We all know there is bad news on the way with taxation."

His comments follow the Labour Party refusing to rule out a further hike in VAT, which went back to 17.5 per cent on 1 January, with the launch of its manifesto on Monday.

For the 26 weeks to 27 February, Debenhams posted pre-tax profits up by 12 per cent to £114.5m, driven by tight stock control, an uplift in gross margins and strong demand for its own ranges, notably Designers at Debenhams. In particular, Mr Sharp cited the strong launch of its Principles by Ben de Lisi designer range in the first half of its financial year.

The profit figure was further boosted by Debenhams converting substantial amounts of floor space to its own ranges last summer, at the expense of concessions. While concessions provide higher sales densities, Debenhams said its own ranges are delivering higher margins.

Gross margins, the difference between the price paid for a product and that which it is sold for, jumped by 70 basis points over the period.

Mr Sharp said: "We always said our story would be a margin story, rather than a sales growth story because of the move from concessions to own-buy. Judge us on profits not sales."

Debenhams posted anaemic 0.3 per cent growth in like-for-like sales at Debenhams over the half year, the same run rate as over the longer 31 weeks to 3 April, which included the first two days of the Easter bank holiday. Katharine Wynne, at Investec, said: "Debenhams does not seem to have had an Easter lift."

Stripping out exceptionals and amortised banking fees, the retailer's pre-tax profits jumped 19 per cent to £123.6m over the half year.

Mr Sharp described the performance of Magasin du Nord, the Danish department store chain it acquired for £12.3m last November, as "good", but said the big opportunity to drive profits would come from introducing its Designers at Debenhams and other own-bought ranges. Excluding the lower margin business of Magasin, Debenhams' gross margins soared by 140 basis points over the half year.

But Mr Sharp dismissed speculation that Debenhams may bid for the Finnish department store chain Stockmann. "There is nothing in it," he said. Boosted by Magasin du Nord, total sales at Debenhams jumped by 8.4 per cent to £1.42bn.

According to KantarWorldpanel Fashion data for the 24 weeks to 28 February, Debenhams grew market share in menswear and childrenswear, but lost share in womenswear, due, in part, to an underperformance on some remaining concessions.

As of 27 February 2010, Debenhams had slashed net debt to £511.5m, down from £415.7m a year ago. This was largely due to its £323m rights issue in 2009.