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Debenhams battered by Liberum rating downgrade, cautious trading update from high street peer Next

Liberum’s analysts cut their stance for Debenhams to ‘sell’ from ‘hold’ with a reduced target price of 40p, down from 58p, after concluding that the group’s “fundamentals do not appeal"
High street
In morning trading, Debenhams shares were changing hands at 42.5p, down 2.9%, or 1.25p on last night’s closing price

Debenhams PLC (LON:DEB) was a big faller today with the department stores operator weighed by the cautious trading news from blue chip clothing retailer Next Plc (LON:NXT) and a downgrade in its rating by Liberum Capital as they fear a “potential value trap”.

Liberum’s analysts cut their stance for Debenhams to ‘sell’ from ‘hold’  with a reduced target price of 40p, down from 58p, after concluding that the group’s “fundamentals do not appeal".

In morning trading, Debenhams shares were changing hands at 42.5p, down 2.9%, or 1.25p on last night’s closing price.

READ: Debenhams getting to grips with digital

In a note to clients,  Liberum’s analysts said: “Looking past the low current rating (CY18E PER 8.4x), we focus on the fundamentals, which do not enthuse us.

“Ongoing structural challenges, a soft consumer environment, rising costs and increasing capex demands make for a difficult outlook, in our view. Our EPS forecasts sit 5% to 8% below current consensus over FY18E-20E, implying a CAGR of -4.6%.”

They concluded: “The shares are down 23% YTD to trade on a CY18E PER of 8.4x, but we fear a value trap. Earnings visibility is low and the downgrade cycle could well extend.”

Debenhams shares were also tracking weakness in other high street stocks as shares in FTSE 100-listed Next dropped as although it lifted its full year profit guidance again and reported third quarter sales growth, the stores group also warned that its performance has been “extremely volatile” and highly dependent on the weather.

READ: Next shares tank as it warns sales performance relies on the weather amid volatile market

Next shares shed 6%, or 307p at 4,614p, while high street rival Marks & Spencer PLC (LON:MKS) dropped 4.3%, or 14.9p to 329.2p, and Primark-owner Associated British Foods plc (LON:ABF) lost 1.9%, or 62p at 3,270p.

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