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Debenhams warns on profits for third time this year as shares and bonds hit all-time low

Ben Woods
Debenhams said retailers faced an 'exceptionally difficult time'

Fears are mounting over the future of Debenhams in the wake of its third profit warning this year, as shares and bonds in the retailer hit an all-time low.

A fierce price war and weak consumer spending has forced the department store chain to forecast pre-tax profits of £35m to £40m, down from £59m last year and below the market consensus of £50.3m.

The drop is partly due to like-for-like sales, which strip out the impact of new stores, slumping 2.1pc in the 41 weeks to June 16.

The dismal update prompted the price of the retailer's bonds to hit a record low of 84.9p, as lenders fears rose that they may not see their money repaid. 

Shares also plunged to the lowest level ever recorded by the retailer, which listed at 195p in 2006, dropping 11pc to 17.5p.  

Sergio Bucher, chief executive, said the weak figures, reflected the “well-documented... exceptionally difficult times in UK retail”.

He added: “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.”

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Debenhams said it would cut back on capital spending to ensure it meets its year-end net debt target of £320m, but would still press ahead with “key strategic initiatives” including a revamp of its beauty halls, improving its mobile website and “revitalising” its clothes lines.

The retailer has attempted to protect margins by selling the majority of its stock at full-price, but has come under pressure for rampant discounting across the sector. 

Some of its rivals have been on promotion 50pc longer than Debenhams, Mr Bucher said, holding sales for 10 of the 15 weeks to June 16. 

He said clothing sales had lost momentum and beauty sales were negative for the past three months. However, online revenues had surged 11.5pc over the 41-week period. 

The company is exploring whether to offload fringe businesses to help fund its overhaul plans, while negotiating with landlords to cut its property costs. 

He added: "We have a right-sizing plan and we think we have the potential to negotiate space reduction with our landlords on 30 stores. 

"We have 25 stores that are up for lease renewal over the next five years. That will help us negotiate lease reductions.”

Shares in the retailer have plunged 80pc over the past three years, leaving it with a market value of £215m. 

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the performance was "all too familiar" for the retailer's "long suffering" shareholders. 

He said: "CEO Sergio Bucher’s recovery plan seems like the right idea.

"A background at Amazon means online sales are taking centre stage, and growth here has been strong.

"Unfortunately it all feels like Debenhams is playing catch up with an industry that’s left it behind."

Debenhams previously posted an 85pc slump in pre-tax profits for the six months to March after sales were hit by the “Beast from the East’s” flurry of bad weather and it struggled to shift full-price gifts over Christmas.

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Its latest update comes as the retail industry continues to be rocked by a spate of restructurings, promising widespread store closures and thousands of job losses.

Retailers New Look, Carpetright and Mothercare have been pulled back from the brink using a restructuring process known as a company voluntary arrangement (CVA). 

House of Fraser also plans to slash more than half its store estate by pushing through a CVA, putting 6,000 retail jobs at risk.

Richard Lim, chief executive of consultancy Retail Economics, said the Debenhams' results “build on the pessimistic outlook for UK retail". 

"It's clear that the business is battening down the hatches, strengthening its balance sheets and preparing for tough times ahead."