Own-brand boost helps Debenhams beat forecasts

Debenhams enjoyed a 20% lift in profits, but how will it far as cotton prices soar?

by Hannah Prevett
Last Updated: 19 Aug 2013
Some good news for Debenhams’ long-suffering shareholders today: the department store has managed to boost profits by 20% in the last year, despite flat sales. The group, which has more than 150 stores in Britain and Ireland, said pre-tax profit for the year to August 28 would be around £150m – beating analysts’ expectations.  

The improvement to Debenhams’ bottom line is thanks, in part, to an uplift in sales in the final quarter, and higher profit margins. It was also given a lift by Debenhams’ decision to take back some of its floorspace to flog its own label (higher margin) get-up, rather than leasing it all to third-party retailers – a strategy which seems to paying dividends.

While chief exec Rob Templeman was cock-a-hoop about the improvement in the bottom line, he sounded a note of caution about consumer confidence - which will no doubt take a further hit when VAT is increased to 20% in January.

He may be facing more serious problems too: floods in China and Pakistan have severely hit cotton crops, pushing wholesale prices to a 15-year high, which could in turn create inflationary price pressure at retailers in the UK. Templeman tried to quell fears about rising prices at the department store saying that the harvest in India – the world’s second largest cotton producer – was expected to be very good.

What’s more, rising prices could even be good for Debenham’s, as customers may choose to trade-down to its own-label ranges, pushing margins even further.

Over at cut-price retailer Primark, parent company Associated British Foods wasn't feeling so positive and warned that the cost of cotton was likely to hit its margins next year. And with prices bound to rise, it is likely to hit consumers’ pockets too – no more £4 pairs of jeans for us then.

Still, it shouldn’t be feeling too down in the dumps – it predicts a 6% rise in sales for the year to September 18. Admittedly this is down on previous years’ meteoric growth, but it has to slow down at some point. The market doesn’t seem to have cottoned on to this just yet: AB Foods’ share price plunged 16p on opening this morning.

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