Shares in multi-channel retailerDebenhams (LSE: DEB) were down by as much as 6% this morning, after the companyreleaseda trading update to the market. Should private investors regard this as an excellent opportunity to buy the companys shares or a signal to stay away?
Drop in sales
Perhaps the most important figure was the slight drop in sales (0.2%) over the last 15 weeks. While disappointing, this is not unexpected given recentsimilar reports from other retailers. More positively, online sales were up by 7% over the last few months suggesting that the company, like its peers, has recognised the importance of offering a quality experience for shoppers who are unable to visit its stores.
Commenting on the update, outgoingChief Executive, Michael Sharp, reflected that trading environment
had been weaker since the new year, particularly in clothing, and our strategy to increasethe mix of non-clothing sales has supported our performance against this background, with Health and Beauty sales in particular continuing to show good growth.
Due to the volatile trading environment, the update goes on to mention that the board would be keeping costs tight, managing margin and driving cash generation but still expects this years profits to meet forecasts.
Overall, this was a mixed trading update from the company, albeit one that contained little in the way of surprises.
Fresh start?
Before today, the most significant news to come from Debenhams was last monthsappointment of ex-Amazon man Sergio Bucher. Given his previous role asvice-president of the online behemothsEuropean fashion business, the decision to give him the job is perhapsunderstandable. Indeed, many of the companys shareholders may have been heartened by the news following a series of profit warnings and poor results.
While it remains to be see whether this appointment was inspired, Im more concerned by Chairman Sir Ian Cheshires comments that Buchersimmediate priority is ascertainingthe identity of their core customer. Given the challenges faced by all retailers at the current time, surely the company already has an idea of the sort of consumer they should be targeting?
Although Sir Ian wenton to say that the average shopperat Debenhams would be muchyounger thantheM&S customer and much more fashion-interested, this still feels unnervingly vague. As an investor, Id be worried.
Cheap for a reason?
Aforecast price-to-earnings (P/E) ratio of just over 9 for next year anda well-covered yield of just under 5% makes Debenhams shares look highly tempting at the current time. Nevertheless, I need to be convinced that this company can recover its earnings andoffer a better retail experience compared to its high street and online competitors.
Next (LSE: NXT), for example, is trading on a P/E of 12 and yet has a far better track record of earnings growth,operating marginsand return on capital employed.Dividends have also grown at a rapid rate over the past five years.
Although its clothing range continues to be less than popular, even Marks & Spencer (LSE: MKS) appears to have better prospects despite the recent slump in its share price, especially given its highly-rated food offering. Its stock nowhas a P/E of 11 and yields over 6%.
And then theresAsos (LSE: ASC). Can you imagine a fashion-consciousshopper deleting the online giants app andbreaking a sweat to rush into one of Debenhamsstores? Neither can I.
If Debenhamshas any hope of attracting youngercustomers, a complete overhaul of its image is required.
The next BHS?
Myuncertainty over Debenhamsability to reinvent itselfmakes me bearish on its shares, regardless of how cheap they appear to be.While there are many differences between thiscompanyand the recently-demised BHS, there are also similarities. Both retailers have struggled to grow earningsin the wake of the explosion in online fashion retailing. Both operate in incredibly difficult conditions on the high street. Both are tired, uninspriring brands.
Of course, this is only my opinion. Today’s drop may be regarded as a golden opportunity for contrarians to buy a slice of the company. The new CEO (arriving in October) may be able to turn things around and inject Debenhams with some much-needed vitality. However, the sheer scale of the challenge before him suggests to me that the next chapter inthis retailer’sstory could beits very gradual, painful extinction, unless its fortunes dramatically improve.
Research has shown that buying quality companies and reinvesting the dividends they pay is an excellent strategy for building wealth over the long term. While the payouts offered by Debenhams certainly look appealing, I’d encourageinvestors tolook elsewhere. One share they may wish to consider has beenidentified by the experts at the Motley Fool and detailed in aspecial FREE report.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
