Debenhams PLC (LON:DEB) is likely to announce a dividend cut when it next updates the market in April after a disappointing Christmas trading update, analysts at Deutsche Bank and Citigroup predict.
The department store chain on Thursday reported a 1.8% decrease in total like-for-like sales at constant currency in the 17 weeks to December 30, driven by decline in the UK where it faced tough competition and a slowdown in consumer spending.
READ: Debenhams blames competitive retail market as it reports drop in quarterly sales
In an effort to offset the weaker sales, the group has identified annual cost savings of £20mln.
But it still expects pre-tax profit of £55mln to £65mln, down from an adjusted £95mln last year, after margins fell following increased promotional activity.
Chief executive Sergio Bucher, who was poached from Amazon last year to improve its online offering and address its failure to focus on full-price sales, said he would update the market on his strategy and the company’s progress in April.
Deutsche Bank reiterated a ‘hold’ rating on Debenhams and cut its target price to 30p from 33p, citing weaker margins.
“On our new forecasts, which are towards the bottom end of the newly guided range of pre-tax profit £55-65mln, we do not see there being risk of covenant breach, but we now expect the dividend to be cut in April,” the bank said, slashing its dividend per share forecast for fiscal year 2018 to 1.850p from 3.425p."
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The banking covenants relate to the company’s £320mln revolving credit facility.
Citigroup also cut its target price for Debenhams to 30p, leaving its rating at ‘neutral’. The broker lowered its pre-tax profit forecast for the year by 32%.
“Our outer year forecasts reduce by a similar amount and we cut our full year dividend assumption to 2.0p from 3.4p,” it said.
Shares in Debenhams fell 3.1% to 29.4p around the midday mark, extending losses from Thursday.