Debenhams Plunges After Cutting Forecast for Third Time

(Bloomberg) -- Debenhams Plc plunged as much as 20 percent after the British department-store owner, struggling to compete with online rivals, cut its profit forecast for the third time this year and reined in spending on turnaround efforts.

The latest warning deepens a U.K. retail crisis that has claimed longtime fixtures of the country’s shopping streets such as BHS and prompted House of Fraser and Marks & Spencer Group Plc to shut dozens of stores. They’re all being squeezed by the rise of Inc. and online apparel sellers like Asos Plc, with bargain hunters turning to Primark and other discount clothing chains as Brexit squeezes spending power.

“We have seen that the situation in the U.K. has really weakened,” Debenhams Chief Executive Officer Sergio Bucher said on a call with reporters. “When you look at key components of our business, clothing has been losing and footwear has been shrinking,” while the beauty business has seen a slowdown in its makeup arm despite an improvement in skin care.

While the company’s e-commerce business is growing, Debenhams is playing catch-up to more digital-focused rivals. Nearly one-fifth of the country’s retail sales have shifted online, leaving Debenhams’ brick-and-mortar profits stuck in a long-term decline. The company expects a pretax profit of 35 million pounds ($46.4 million) to 40 million pounds, compared with a market consensus of 50.3 million pounds.

Debenhams shares were down 7.2 percent at 10:41 a.m. in London, dragging the company’s market value to 223 million pounds -- down from almost 2 billion pounds when it went public in 2006. Debenhams’ 200 million pounds of bonds due July 2021 fell 3 pence on the pound to 84 pence, the lowest on record, according to data compiled by Bloomberg.

“Debenhams lacks differentiation and the business model to survive the structural changes ongoing across the sector,” Berenberg analyst Michelle Wilson said by email.

Debenhams wasn’t the only British retailer to sound the alarm Tuesday. Fashion and footwear chain Footasylum Plc forecast that adjusted earnings, which grew 12 percent to 12.5 million pounds in the year ended February, will grow more modestly in the current financial year. The company cited the need to invest in its stores and weakening consumer spending, sending the shares down as much as 48 percent.

Ashley, Odey

Mike Ashley, CEO of Sports Direct International Plc, has increased his holding in Debenhams, spurring speculation he may try to buy it outright. Other views are less sanguine: Hedge-fund manager Crispin Odey, whose Odey Asset Management has a short position in the retailer, has said Debenhams and House of Fraser are in a race “as to who will go down first.”

To strengthen its balance sheet, Debenhams plans to cut capital spending to a range of 75 million pounds to 90 million pounds next year, from about 140 million pounds in the current year, said Chief Financial Officer Matt Smith, who is leaving to take up the same role at department-store operator Selfridges.

“Whilst this seems very sensible to us, being so capital constrained clearly makes it much more difficult for management to deliver on its transformation plans,” Morgan Stanley analysts Geoff Ruddell and Amy Curry said in a note.

Borrowing a page from Selfridges, Bucher has been trying to revamp its stores by adding cafes and other attractions that are intended to keep shoppers around longer. But many consumers just want the lowest prices, and they’re finding those online or at discount rivals.

Debenhams said it’s reviewing noncore assets, including its Magasin du Nord stores in Denmark. It’s also held talks to rent out excess space in its flagship London department store to flexible-office provider WeWork Cos., people with knowledge of the matter said earlier this year.

©2018 Bloomberg L.P.