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Debenhams expects profits to outstrip forecast by £6m

Retailer says guerilla promotions have enabled it to snatch trade from rivals such as John Lewis

There was some rare good news from the high street when Debenhams said profits would be higher than expected as guerilla promotions helped the department store to snatch custom from rivals.

Debenhams offered discounts, including starting its summer sale five days early, to win trade from competitors such as John Lewis and Next. Last week, market leader John Lewis said its profits had more than halved in the first six months of the year as its “Never knowingly undersold” pledge meant it had to cut prices to match rivals’ deals.

Debenhams chief executive Michael Sharp, who succeeded Rob Templeman this month, said consumers were being frugal and promotions helped it to “get ahead of the market”. The department store drove sales with customer events that cut profit margins but boosted the number of goods sold. This meant that although the group’s profit margin rate for the year could be lower than in 2010, profits for the year to 3 September are now expected to be £6m higher than the £158m analysts had pencilled in.

The retailer’s branch in London’s Clapham Junction was among the high-profile casualties of last month’s riots, but Sharp said the looting did not have a material impact on business which was insured for losses.

Sharp said the exclusive Designers at Debenhams fashion brands, which includes ranges by Betty Jackson, Julien Macdonald and Matthew Williamson, were also proving a draw for shoppers, helping it to gain market share in key areas including women’s and children’s wear.

He said the group had outperformed a tough clothing market: sales, by value, increased 1.5% in the 24 weeks to 7 August but that reflected a near 6% increase in average selling prices, implying that retailers’ sales volumes were down 4%. “Although there have been many stories of extremely tough trading in July and August, for Debenhams, trading in these months has been good,” said Sharp. Like-for-like sales edged up 0.4% in the nine weeks to 27 August.

With spending power eroded by higher prices and a dearth of credit, consumers’ habits are changing; shoppers are visiting more stores and hunting for discounted goods. Numis analyst Andrew Wade said: “Debenhams was boosted by a consumer increasingly reliant on [promotional] activity as a “call to action”.

Debenhams also said it was making progress in reducing the £1bn debt pile that has weighed on its shares since it was returned to the stock market in 2006 by its private equity owners.

The company, which debuted at 195p, said it paid back £130m during the year and the figure now stood at £385m. The shares closed down 0.8p at 58.5p.

Retailers are anticipating a fierce battle for sales as they enter the “golden quarter” that includes Christmas and is when many make the bulk of their annual profits. Sharp did not rule out using promotions to win trade, saying it would “react accordingly”. He said: “We have seen nothing to suggest the economic situation is going to improve, so we are laying out our stall assuming that it is going to continue to be tough.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds