S&P upgrades outlook on Debenhams, expect improving trends this year
Ratings agency S&P said it sees an improved operating performance this year at UK department store chain Debenhams, as it raised its outlook for the company from 'negative' to 'stable'.
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The agency, which maintained its 'BB-' corporate credit rating for the retailer, said its revised outlook "reflects our view that the group should continue to maintain its competitive position, and moderately improve its margins and free cash flow generation".
While continued capital investment is expected, S&P said that a modest estimated improvement in profits at Debenhams should be able to lower its leverage - net debt to operating profits - ratio further.
The agency forecasts "intensified competition" from larger retailers like Marks & Spencer and Next, and also from fashion chain New Look. That said, it applauded Debenhams' diversified business model, which combines own brands, international brands, and a wide variety of concessions.
"Debenhams' profitability, which we still regard as 'above average', is supported by its exclusive core and designer brands, which comprise about one-half of its total sales, and the above-average volume of products that it sources directly from suppliers," S&P said.
The agency now reckons that Debenhams has a "satisfactory" business risk profile, though its financial risk profile is regarded as "aggressive" due to its substantial operating lease commitments.
"The bulk of Debenhams' adjusted debt (more than 85%) relates to the capitalisation of operating lease commitments. Without the lease adjustment, Debenhams' debt to EBITDA will be substantially lower."
Debenhams' shares were up 1% at 95.3p by 13:37 on Wednesday.