Yet another profit warning from struggling department store chain Debenhams PLC (LON:DEB) on Tuesday left many on the market emitting a resigned sigh as analysts turned toward when, not if, a rescue plan would make an appearance.
In a trading update, the company effectively threw out a January statement that full-year profits would be “in line with market expectations”, saying the guidance was “no longer valid”.
READ: Debenhams sinks as it throws out January profit guidance
It is the fourth profit warning issued by the company over the last 15 months as a torrid 2018 saw it post a record annual loss of nearly half a billion and earmark 50 stores for closure, putting thousands of jobs at risk.
The market responded predictably with shares sinking 1.3% to 3.15p in mid-afternoon, although given that the stock has dropped almost through the floor, down 89% in the last year, it only has so much left before rock bottom.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said while it wasn’t clear “quite how badly” the company’s profits had been hit, but an unscheduled trading update rushed out not too long after the last one meant the forthcoming interims “aren’t going to make for pleasant reading”.
Khalaf added that with fewer customers coming through the door, the group would need to rely more on debt to fund itself, adding “further financial pressure”.
“Debenhams’ future is hanging in the balance, and with short sellers circling too, we can expect share price movements to be volatile. The department store needs to stage a Lazarus-like recovery to turn things around from here.”
No interim results date leaves broker expecting imminent news of turnaround
The fact the group didn’t announce a date for its interim results also left analysts at broker Peel Hunt speculating that some kind of salvage effort, either in the form of an equity raise, a company voluntary agreement (where the firm agrees a debt repayment plan with creditors), or a restructuring was likely to come “sooner rather than later”, possibly by the end of April.
The broker slashed its target price by 75% to 1p from 4p, saying that Debenham’s second half would be hit by “working capital challenges and general trading disruption” even before any potential turnaround efforts were taken into account.
Vital signs “weak”, shadow of Ashley looms large
Russ Mould, investment director at AJ Bell, was also pessimistic, saying that even if the company could survive a restructuring it would “end up running to a standstill” unless it could address the reasons behind its declining performance, namely online sales numbers and its burdensome store estate, which currently numbers around 165 in the UK.
Mould added that the renewed troubles would heighten speculation around a possible takeover bid from Sports Direct International PLC (LON:SPD) boss Mike Ashley, who owns a 30% stake in the chain and may look to combine it with House of Fraser, which he rescued from administration last summer.
Ashley has already been throwing his weight around at Debenhams, having offered the group a £40mln loan last year and ousted the chairman and chief executive in a shareholder rebellion in January.
READ: Debenhams turned down £40mln loan offer from Mike Ashley’s Sports Direct - media report
An analyst at a mid-tier investment bank told Proactive that while there was no certainty Ashley would make a bid, Debenham’s would likely “be taking a closer look” at the £40mln loan offer.