Debenhams' debt casts a long shadow

Published on Tuesday 17 March 2009 20:07

INVESTORS baled out of Debenhams yesterday as concerns over the group's debt pile overshadowed news of a rise in profit margins and the creation of 1,200 jobs.

Shares in the department store chain have been under pressure for some time on fears about its ability to pay off its borrowings amid a slowdown in consumer spending.

Yesterday, chief executive Rob Templeman sought to reassure investors, saying net debt at the end of the first half was lower than a year earlier.

However, he refused to be drawn on recent speculation that the group plans to turn to shareholders for additional funds to cut its borrowings.

Debenhams' net debt at the end of August stood at just under 1 billion.

Templeman said: "The board has made no decisions about all the speculation (about a possible rights issue] that's been in the press. We are aware that leverage is having an impact on our equity price."

Shares in the retailer, which has 153 stores in the UK and Ireland, closed last night at 41p, a fall of almost 11 per cent, having hit 39.75p earlier in the session.

The sell-off came as Debenhams announced that like-for-like sales had fallen 3.6 per cent in the 26 weeks to 28 February and warned that trading would "remain challenging".

This compares with analysts' expectations of a fall of 3 to 4 per cent and with a decline of 3.5 per cent in the first 18 weeks of the period.

Improved margins mean that pre-tax profit for the first half is set to top the previous year's 94.1 million.

Debenhams, which opened new branches in Livingston and Dunfermline towards the end of last year, also said it aimed to create 1,200 jobs by the end of 2010. In addition, about 7,500 temporary workers are expected to be taken on for Christmas trading this year.

Templeman claimed the group, which refloated at 195p-a-share in 2006, was grabbing market share from its competitors in all major product categories.

He said the firm's main focus was on cash profit, rather than sales, and "our increase in profits during the first half is testament to this aim".

But he warned: "Visibility for the second half remains poor and we will continue to run Debenhams in the expectation that the trading environment will remain challenging."

Kate Calvert, an analyst at stockbroker Shore Capital, said the lack of information on debt restructuring was playing on the share price. "The key issue for the shares has not been addressed – high debt levels and we believe this is the reason for the negative share price reaction," she said.

However, Calvert upgraded full-year profit forecasts for 2009 by 4 per cent, to 106.3m.

Analysts at investment bank Credit Suisse said: "There is a very high level of short interest in these shares and availability has fallen back sharply of late so shares could be volatile."