City brokers have issued a raft of upgrades for Debenhams ahead of its pre-close update next month.
Despite the disruption to fourth- quarter trading – caused by the department store operator’s decision to convert about 5% of space to own-bought label – brokers welcomed the likely lift to gross margins and said that the autumn ranges had been well received.
Numis analyst Andy Wade said that he expected a “solid out-turn” when Debenhams updates the City on September 15.
Although he expected like-for-likes to be down about 4% in the fourth quarter as a result of tougher comparatives and upheaval from converting the space, he forecast that gross margins will have “moved ahead strongly”.
Wade said: “Debenhams is continuing to deliver operational improvements across its business.”
KBC Peel Hunt analyst John Stevenson said that Debenhams remains the broker’s “top pick” of clothing retailers. He said: “Debenhams continues to proactively manage its portfolio of brands and trading space.”
Stevenson believed that Debenhams exited its spring 2009 ranges cleanly. He added that improvements to and extensions of ranges “continue to drive notable improvements to the overall offer and environment – a level of evolution lacking from many of Debenhams’ high street competitors”.
Investec analyst Katharine Wynne said: “While we expect the demand environment to be subdued in 2010, we see the prospect of margin expansion at Debenhams and see the current valuation as too low.” She raised her target share price to 105p.
Wynne believed that rather than investing margin gains in promotional activity to support sales, Debenhams had taken the additional cash profit from lower markdowns.
She thought that Debenhams will have sustained the 90-basis points improvement in margins reported in the third quarter, compared with Investec’s previous forecast of a 20-basis point rise.
n Numis raised its pre-tax profits forecast for the full year to August 2009 to £133m, up from £126m, and forecast a £144m pre-tax profit in the year to August 2010, up from £110m.
n Investec upgraded its pre-tax profits for the year to August 2009 by £5m to £122m and for the full year to August 2010, by £3m to £135m.
n KBC Peel Hunt said that “a more stable build up to peak trading would provide the potential for material forecast upgrades”.