Good morning!

As you know, I like to keep an eye on mid to large cap retailers, as this gives a good feel for how consumer sentiment & spending are going, and sector trends. So here are some brief comments on Debenhams trading update today:


Debenhams (LON:DEB)

Share price: 43p (down 3.4% today)
No. shares: 1,227.8m
Market cap: £528.0m

(at the time of writing, I hold a short position in this share)

Trading update - I was expecting a lot worse actually, so these figures aren't too bad.

LFL sales in the last 15 weeks are down 0.9% (41 weeks: up 1.8%)

Costs are rising by 3% p.a. - this is the big problem for all UK retailers (DEB also has overseas operations) - that they're struggling to generate any LFL sales increases, hence rising costs are hitting the bottom line.

Outlook for the full year isn't too bad;

We currently anticipate that 2017 profit before tax will be within the range of market expectations. However, should current market volatility continue, the outcome could be towards the lower end of the current range.


Overall, not a disaster by any means.

So why have I shorted this share?

  • Forex hedging is still protecting margins, but will unwind during 2018 (DEB has particularly long-dated forex hedging) - so gross margins likely to come under pressure.
  • Low operating margin, and high operational gearing - so the company could swing into losses fairly easily in future.
  • Dept stores are struggling big time in USA. They're starting to be seen as retail dinosaurs - so the same could happen here.
  • Improving performance usually requires heavy capex - because refreshing huge, multi-floor stores is very expensive.
  • Sentiment is against traditional retailers - just look at the charts. Investors seem mainly interested in chasing up e-commerce shares.
  • The all-pervasive Amazon threat.
  • DEB is stuck in long leases, that it can't get out of. That's not a problem if stores are profitable, but if they become loss-making, it is a problem that has killed many retailers before.
  • Weak balance sheet.


Therefore, rightly or wrongly, I've come to the conclusion that it might be best to bet against the current share price. As to the future, my hunch is that DEB might eventually need to do a CVA, to get out of problem leases.

Shorting is dangerous of course, and…

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