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RBC cuts target for Debenhams following third profit warning

Published: 19:32 25 Jun 2018 AEST

Debenhams department store
The Canadian bank cut its target price to 19p from 25p

Canadian bank RBC has cut its target price for department store chain Debenhams PLC (LON:DEB) to 19p from 25p following the company’s third profit warning in six months.

Analysts slashed their pre-tax profit (PBT) forecasts for the firm by 25%-30%, saying they didn’t expect much improvement in sales for the remainder of the current financial year.

READ: Debenhams issues another profit warning but expects improvement next year

Debenhams was facing easier comparisons as from May but we think it has continued to suffer from having a sub-optimal clothing and home offer and from being overly reliant on promotional activity to drive footfall and online spend” the bank said.

They added: “Debenhams has stated that it would only breach its fixed charge covenant if PBT falls below £20mn, but on c.£3bn of Gross Transaction Value (GTV) we estimate “this means Debs is only one poor Christmas away from a breach.”

Despite the bleak outlook, the bank also highlighted several options for the company to strengthen its balance sheet, including its plan to cut capital expenditure for the 2019 financial year to £75mln-£90mln from £140mln in 2018 in addition to a strategic review of its non-core assets, a small printing business in south-west England and Danish department store chain Magasin.

RBC said Magasin was Debenhams' most profitable business and has a growing multi-channel capability which could be of interest to buyers in a potential sale that could be a “potential positive catalyst for the shares”.

Debenhams issued its third profit warning on 19 June, pointing to “exceptionally difficult times in UK retail”.

The retailer, which first warned on profits in January and again in April, said trading in May and early June fell short of expectations due to increased competitor discounting and weakness in key markets.

In mid-morning trading Monday, Debenhams shares were down 1% at 17p.

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