Department store chain Debenhams saw its shares slide almost 7 per cent after the London-based group said the newly-acquired Roches Stores business in Ireland would contribute to lower profit margins.
Debenhams said the integration of Roches was ahead of schedule following the €29 million buy-out of the Irish chain last August, when it paid an additional sum of more than €10 million for Roches' stock.
But in a trading update in which Debenhams pointed to weak clothing sales group-wide in the crucial Christmas period, it said the high rate of concession sales at Roches would take a toll on its gross margin.
"The group's sales mix in the first half has been affected by slower than expected clothing sales, but more importantly as a consequence of the impact of the integration of the Roche stores and their reliance on lower gross margin concession sales," Debenhams said.
"Combined, these will have some impact on gross margin at the half year."
Given "higher intake margins" and the faster than expected integration of Roches, the group still expects further progress on its gross for its full financial year, which runs to September.
"Debenhams' sales performance has improved since we reported figures for the period to 10th December, 2006 but the market remains challenging and we are cautious about the out-turn for the rest of this financial year," said chief executive Rob Templeman.
The trading statement for the 19 weeks to January 19th, 2007 said total cumulative sales at Debenhams were up 6.3 per cent on the same period last year, but that like-for-like sales in its British retail business were down 4 per cent in the same period.
Debenhams shares dropped 6.94 per cent on the news, closing 12.75 pence weaker at 171 pence (259.66 cent) on the London Stock Exchange. The figures covered a period in which British department store rivals such as John Lewis and House of Fraser performed well.
The latest trading statement from Debenhams follows indications last October that the Roches business will not add a single penny to its profits until the financial period starting next September.
The conversion of the nine Roches outlets is expected to be completed by the end of the current financial year.
The upfront consideration was €15 million at the time of the transaction, with €5 million payable in August and €9 million in August 2008, the second anniversary of the deal. Members of the Roche retailing dynasty stand to receive annual rents of almost €18 million for use of the store sites in a long-term leaseback arrangement with Debenhams.
