Debenhams says cotton costs may have peaked as profits rise 4.5%

Department store group Debenhams provided some cheer for the embattled retail sector yesterday as it posted a 4.5 per cent rise in profits and signalled that the recent surge in cotton prices may have peaked.

The group, which has about 170 stores in Britain, Ireland and Denmark and about 60 franchised outlets in 24 countries, is hopeful that commodity prices such as cotton will fall back in a move that would ease some of the pressure on consumers and the margins of major retailers.

Its assurances came as it unveiled a rise in underlying pre-tax profit to 129.2 million for the six months to 26 February, despite flat same-store sales, as the chain concentrated on higher-margin private label and designer brands. The figure was slightly ahead of City expectations.

Debenhams, which ended the period with net debt of 351.6m, also announced a dividend for the first time in three years with a 1p payout. However, the group gave no indication about its current trading performance.

A string of big high street names, including HMV, Mothercare and PC World parent Dixons Retail, have warned on profits as they struggle to pass on rising prices to cautious shoppers, so Debenhams' prediction that costs could ease will come as a boost to the sector.

Earlier this week it emerged that the official rate of inflation had eased to 4 per cent in March from February's 4.4 per cent as retailers embarked on further discounting in a bid to attract custom. Many economists believe that prices will start to pick up again in coming months, boosted by demand from emerging markets.

Debenhams said it was encouraged by strong sales from its exclusive ranges from designers such as Jonathan Saunders, Preen, Jonathan Kelsey and Jasper Conran.

It claims to have grown its share of the womenswear, childrenswear, cosmetics and perfume markets, with particularly buoyant sales of lipstick, mascara and nail varnish.

At its store on Princes Street, Edinburgh, best sellers during the first half included Red Herring button-through cardigans, cotton rich "perale" bed linen and Presence Eve Balcony bras. Three-point leather gloves and "J by Jasper Conran" Merino v-neck tops were among the top-selling items at the group's revamped Glasgow Argyle Street branch.

Sales through the group's internet arm, Debenhams Direct, leapt 82 per cent with the help of a new mobile phone application.

Chief executive Rob Templeman, who announced he would be stepping down in September to be replaced by his deputy Michael Sharp, said he was pleased with the first-half performance.Templeman, who has been at the helm for eight years and will remain as a consultant for up to a year after his retirement, said: "The trading environment has been difficult but our focus on profit and cash generation has continued to deliver returns.

"Debenhams has now produced six consecutive halves of pre-tax profit growth in what has been a consistently challenging retail climate."

The group returned to the stock market in 2006 after two and a half years in private equity hands.