Debenhams PLC (LON:DEB) issued its third profit warning in six months with the department store chain pointing to “exceptionally difficult times in UK retail”.
In reaction, shares fell 8.4% to 17p in late morning trading.
The retailer, which first warned on profits in January and again in April, said trading in May and early June fell short of expectations due to increased competitor discounting and weakness in key markets.
WATCH: 'Black Tuesday' for UK retail with yet another profits warning for Debenhams
It now expects pre-tax profit for fiscal year 2018 to be in the range of £35mln to £40mln and underlying earnings (EBITDA) of £160mln to £165mln. The current market consensus for pre-tax profit its £50.3mln.
In the 15 weeks to June 16, like-for-like sales increased 1.7% and digital sales grew 16%.
Tough conditions unlikely to change in near future, says CEO
“It is well-documented that these are exceptionally difficult times in UK retail, and our trading performance in this quarter reflects that,” said chief executive Sergio Bucher, a former Amazon executive who joined Debenhams in 2016.
“We don’t see these conditions changing in the near future and, because it is our priority to maintain a robust balance sheet, we are making very careful choices about how we deploy capital.”
Bucher is one year into his turnaround plan that includes store closures, cutting promotions and improving online services, but his efforts have been undermined by struggles on the UK high street resulting from a squeeze on consumers from higher inflation and stagnant wage growth.
Debenhams CFO sees profits improving next year
The company said it was taking action to strengthen its balance sheet, cut costs further and focus on digital sales. It plans a "material reduction" in capital expenditure in the 2019 fiscal year and will carry out a strategic review of non-core assets.
Chief financial officer Matt Smith said at an investor conference that he expects the group's profits to improve in 2019 on the back of its restructuring but it will depend on Christmas trading.
Smith also confirmed that 18 of the stores set to close would be in the same towns or shopping centres as the House of Fraser stores earmarked for closure.
He said the retailer would benefit from some of House of Fraser's store closures such as on Oxford Street or in Milton Keynes where the two department store chains are close together. However, it would be a different story in smaller market places, he said.
Debenhams to reduce discounting, address decline in footfall
At the investor conference, Bucher said Debenhams would "reduce promotional pressure and promotional days".
He said fewer shoppers at its stores was the main problem for Debenhams with industry data showing a 4% decline in footfall so far this year.
In April, the group announced that it was reducing the size of at least 30 stores by giving space to restaurants and other food businesses in response to the consumer shift towards online shopping.
READ: Debenhams drops after warning again on full-year outlook, chops dividend, posts 52% slump in first-half profit
"CEO Sergio Bucher’s recovery plan seems like the right idea," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
"A background at Amazon means online sales are taking centre stage, and growth here has been strong. Playing to the group’s strengths in cosmetics and concessions also makes sense."
Hyett added: "Unfortunately it all feels like Debenhams is playing catch up with an industry that’s left it behind. Debenhams reckoned it was heading for something like £750m in annualised digital sales at the half year, compared to total sales of £2.3bn in 2017. There’s some way to go before good digital growth offsets the stresses elsewhere."
Liberum maintains 'sell' rating, cuts target price
Liberum repeated a 'sell' rating on the stock and cut its target price to 10p from 15p, saying it continues to see Debenhams as a "value trap".
"Continued weak trading has led Debenhams to issue a 25% profit warning," it said.
"This comes on top of the already 50% cut to our estimates over the last 12 months and highlights the ongoing structural pressures that we do not expect to abate."