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Gamble of the week: down-trodden department store
This department store has had a rough time over Christmas, says Phil Oakley. Brave investors should buy in now.
Last year I tipped this compnay, thinking that it was one of Britain's better retailers. I was wrong. The shares have been a terrible investment, with two profit warnings in the last year.
The company has had a bad Christmas. It has had to slash prices to keep sales at the same level as last year, but it still has too much stuff left over to sell. This means there will be lots of big discounts on offer in January and February. That's bad news for profits.
If you needed a good example of how some retailers' profits are very sensitive to small changes in margins, then this one fits the bill. By cutting prices, its gross profit margin will fall by around 1%, yet pre-tax profits are expected to fall by a quarter for the first six months of its financial year.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Debenhams blames heavy promotional activity on the high street, but this hasn't stopped the likes of Next, John Lewis and House of Fraser from doing well. This is what has worried the market. That said, Debenhams is not likely to go bust.
Debenhams had net debt of £372m in August, but its ability to pay its interest bills and the rents on its shops is still quite comfortable. The key issue is whether it can get its business back on track and start growing profits again.
It needs to become more focused and start selling more online for starters. Sentiment towards the company is very poor right now, but this looks priced into the shares. At 76p, they trade on 8.6 times this year's reduced profit forecasts, while offering a well-covered dividend yield of 4.3%.
You could argue that that's about right for a company in a competitive sector with much to prove, but if Debenhams can fix its problems then the shares have the potential to bounce higher.
Verdict: a risky punt
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