Debenhams & the missing guidance upgrade

Life-for-like (LFL) sales growth is usually regarded as the holy grail of retailing, and department store Debenhams delivered it in spades at the end of its trading year, but the market was puzzlingly indifferent to this achievement.

Having reported year-on-year (y/y) LFL sales growth of 3.1% (excluding Value Added Tax, or VAT) in the 16 weeks to June 23rd a few months back, the group put on a spurt in the final 10 weeks of the financial year (to September 1st) to achieve LFL growth of 3.7% (excluding VAT). Peel Hunt had been expecting growth of somewhere between 1.5% and 2%.

For the year as a whole group sales were 1.6% of the previous year, which was better than the 1.3% improvement Panmure Gordon had pencilled in.

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Given the pounding clothing chain Next took last week after it said sales had been disappointing in August, shareholders in Debenhams might have expected the group's summer surge to have been rewarded with a bit more market enthusiasm than it got.

Seymour Pierce said the update was a "good result in volatile market conditions." However, vis-a-vis Next, it does point out "the update may surprise some after Next reported a sales slowdown in current trading last week. However, Debenhams trading update covers a different period and does not include the first two weeks of September as Next's comments did. These were particularly weak for the industry."

A search for other potential reasons for the lukewarm reception does not uncover many.

The gross margin for the 52 weeks to September 1st, 2012, is expected to be three-tenths of a percentage point lower than the previous year, but the group had already flagged this to the market.

Maybe bulls were hoping for a late fillip to full-year guidance figures, in which case they were disappointed; Debenhams said profit before tax for the fiscal year just ended will be in line with current market conditions, which implies a figure of somewhere between £153m and £165m. The median forecast in that range is £158.4m.

Panmure Gordon could be on to something when it suggests that a better than expected LFL sales performance would normally lead to an increase in profits guidance.

"We think that the main reason for today's lack of profit upgrade is additional investment in systems and logistics to support the multi-channel business, since Debenhams' roots do not lie in Home Shopping (unlike Next for example)," the broker notes, adding that the slightly higher guidance on net debt might encourage some holders to bank gains after the stock's good run.

Fiscal year-end net debt is expected to be around £15m lower than last year at around £370m. The company continues to generate cash and has, in the past, used some of this to buy back shares, but shareholders will have to wait until October 25th to learn the size of the next tranche of share repurchases.

Peel Hunt remains a fan of the stock, and has a target price of 115p. "Debenhams continues to benefit from a high level of self-help that will drive sales momentum over the year ahead. Online initiatives, including the 'endless aisle', which gives online customers access to store stocks and has driven significant improvements in availability, continue to lift multi-channel participation," said Peel Hunt's retail analyst, John Stevenson.

Seymour Pierce reckons the shares are no more than a "hold". The broker's retail analyst, Kate Calvert, finds plenty of reasons to believe that Debenhams will keep on growing, but it is no longer so obviously undervalued versus its peers.

"Debenhams has 30 of its 165 stores left to refurbish which will take another two years and its new store pipeline is building again, though remains dependent on the property market. Management believes there is potential for 240 stores - a theoretical £1bn sales opportunity (FY11 [fiscal 2011] sales of £2.4bn). Management has 20 stores in its five year plan of which 15 are under contract, seven have full planning permission and a couple have builders are on-site," she notes.

"The share price has rallied strongly by 25% (sector +13%) over the last three months and 67% over the last year and closed the valuation gap on its peers trading on a CY13 PE [current year price/earnings multiple] of 10x compared to M&S and Next on 10.8x and 11.7x respectively," Calvert added.

Given that level of recent out-performance, as many stock market stars have discovered, merely doing "very well" (to quote old Mr Grace, of Grace Brothers' department store) is not good enough to keep the bandwagon going.