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Debenhams looks to axe dividends and close more stores in cost-cutting drive

Debenhams reports its full year results on Thursday after issuing a series of profit warnings
Debenhams
Debenhams is under pressure to avoid the same fate as House of Fraser

Department store chain Debenhams PLC (LON:DEB) is reportedly looking to axe dividends and announce further store closures as it seeks to cut costs to offset sluggish sales.

The retailer, which publishes its full year results on Thursday, and other department store chains have struggled as more consumers switch to online shopping and hunt for bargains.

Debenhams has issued four profit warnings and lost two-thirds of its share price since the start of the year.

The company has so far avoided an insolvency process, known as a company voluntary arrangement, that a number of retailers including New Look, Carpetright, House of Fraser and Mothercare have agreed with creditors this year to allow for store closures and reduced rents on remaining sites.

But Debenhams has been under pressure to turn around the business and avoid the same fate as main rival House of Fraser, which was rescued by Sports Direct International PLC (LON:SPD) in August.

READ: Department stores aren’t dead: Why Mike Ashley can turn House of Fraser around

According to City AM, the group is hoping to save £30mln by cutting dividends and a further £70mln by reducing capital expenditure.

Tough year for UK high street 

Debenhams’s new finance chief Rachel Osborne is understood to be considering closing up to a third of its 166 stores, on top of the 10 closures already announced.

“It’s been a tough year for the UK high street, particularly department stores. We’ve seen household names like House of Fraser topple, while John Lewis was stung by plummeting profits,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

“Debenhams is facing its fair share of challenges too - disappointing in-store sales and decreasing gross margins are eating into profits.”

In a trading update in June, Debenhams said it expects to report full year profit before tax of £35mln to £40mln, well below previous market expectations.

READ: Debenhams issues another profit warning but expects improvement next year

Improving in-store experience makes sense, says analyst

Debenhams is trying to revamp stores with a new “social shopping” experience in an attempt to improve footfall but the company is running up capital expenditure to carry out the plan.

Hyett believes the retail giant has the right idea by improving the in-store shopping experience.

READ: Is Debenhams' public listing the cause of its woes?

“The high street can only compete with online by making the most of its real world presence, but the proof’s in the pudding,” he said.

“Next week’s like-for-like (LFL) numbers will show if the tills are actually working any harder. “

As for the company’s strengths, Hyett reckons the online business is “looking pretty robust” and is growing rapidly - now accounting for £1 in every £5 of revenue. Investors will be hoping Debenhams reports further momentum in the online business in the annual results. 

“It’s still early days, and there’s still lots of investment in the store estate to come,” Hyett said. “But wider market conditions means the pressure’s on to show signs of progress.”

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