What's going on?
For the third time this year, UK department store chain Debenhams has warned investors that its annual profit will be even lower than expected (again), sending its stock cratering by over 10% on Tuesday.
What does this mean?
Debenhams has blamed its rough year on competitors’ continued discounting – as well as a tough time selling to customers on the UK high street. This year’s also seen one of Debenhams’ rivals, House of Fraser, close half its stores in a bid to avoid bankruptcy. Earlier in 2018, Debenhams had hoped that the second half of the year would help to turn things around, but that’s no longer the case. The company now expects 2018’s profit before tax to be between £35-40 million – a far cry from investors’ previous expectations of £50 million.
Why should I care?
For markets: It’s a dicey time for Debenhams’ debt investors, too.
Thanks to a lower profit outlook, Debenhams plans to significantly reduce its capital expenditure (which might include spending on things like store refurbishments and technology) and is considering selling off its stores in Denmark. These new plans follow an earlier drive – started in February – to slash costs and save £20 million a year. Debenhams is trying to make sure it doesn’t breach its “covenants” – the terms it agreed to when borrowing money. If it does (by having too much debt relative to its profit, for example) then its creditors could demand immediate repayment in full… or worse.
The bigger picture: Debenhams may find a new home in sports.
Sports Direct – the UK’s largest sports discount chain – has built up a stake just shy of 30% in Debenhams’ stock over the years. If it exceeds 30%, Sports Direct will be obliged to make an offer for the entire company. Some investors believe it’s Sports Direct’s end goal since the companies have already started working together in an operational partnership that could expand into a strategic one.