The bottom line at retail colossus Debenhams (LSE: DEB) has struggled in recent times in the face of mounting competition and rising pressure on shoppers’ wallets. And the latest trading update released on Tuesday convinces me that the department store will remain a ‘growth dud’ for some time yet.
Debenhams — which was last 3% down on the day and dealing at fresh eight-year lows around 43p per share — has seen sales growth continue to slow in recent months, like-for-like revenues falling 0.9% during the 15 weeks to June 17. This compares with the 1.8% advance punched during the 41 weeks to mid-June.
“The UK trading environment has been less predictable since Easter, with industry data confirming May was tough for the retail industry,” the business advised. Debenhams added that while it expects “profit before tax will be within the range of market expectations… should current market volatility continue, profit before tax could be towards the lower end of the current range.”
Broker consensus had previously put pre-tax profit at Debenhams for the year to August 2017 at £100.2m. This would represent a meaty drop from the £105.8m reported in fiscal 2016 if realised, and mark the fourth drop in five years.
The City had already been expecting Debenhams to endure severe stress even before today’s profit warning, anticipating earnings drops of 16% and 9% for fiscal 2017 and 2018 respectively.
And all the while data from the high street continues to deteriorate. The latest survey from YouGov and the CEBR today showed consumer confidence in the wake of this month’s general election sinking to its lowest since last June’s EU referendum
I reckon the prospect of massive earnings downgrades in the near-term and beyond makes Debenhams a gamble too far, despite its ‘cheap’ forward P/E rating of 6.6 times.
Crude concerns
Tullow Oil (LSE: TLW) is another stock destined for much more trouble.
The fossil fuel colossus recently tipped to its cheapest since November 2004 around 145p per share, Tullow’s multi-year slump showing no signs of abating. Investors remain fearful over the company’s fragile balance sheet, despite the recent $750m rights issue. And with little wonder, as net debt rang in at a frightening $4.8bn as of the close of December.
Tullow continues to splash the cash on its exploration projects in Africa and, with oil prices still moving back into reverse (Brent hit seven-month troughs below $45 just last week), concerns are rising that the business may be forced into further drastic measures to meet its financial obligations.
The impact of resurgent US shale production on crude values has unsurprisingly prompted analysts to frantically downgrading their profits forecasts for Tullow for the current year and beyond. Earnings of 10.7 US cents per share are now anticipated for 2017, versus losses of 65.8 cents last year, and a further 41% rise is predicted for 2018, to 15.1 cents.
With brokers still busy scribbling out their previous oil price estimates (indeed, Macquarie cut its black gold forecasts through to the close of 2018 in recent days), I reckon share pickers should be prepared for further downgrades to Tullow’s profit projections.
And I believe Tullow’s forward P/E rating of 17.7 times fails to reflect its high risk profile, and reckon this should lead to further weakness in the company’s share price.