HSBC downgrades Debenhams on structural concerns

9th Sep 2016 08:15

(ShareCast News) - HSBC downgraded Debenhams to 'reduce' from 'hold' but nudged the price target up to 55p from 53p, pointing to long-term structural concerns.The bank said a rally in GBPUSD has supported a rebound in wider sector valuations. However, Debenhams is structurally challenged.It noted the company has 165 UK department stores with average lease lengths of around 22 years versus around seven to eight years for Next, and M&S with freehold ownership."Next and M&S also have a volume-led advantage on price. As a result, Debenhams has less flexibility to reduce fixed costs to adapt to a rapidly evolving, increasingly competitive omnichannel market."The bank said that while new chief executive Sergio Bucher - ex-Amazon Fashion Europe, Puma, Nike, Inditex - arrives in October and is likely to drive change, any clarity on strategy seems unlikely before the interim results in April 2017. In addition, the investment required to reposition the group as an online play on international markets, or to restructure UK property exposure, is likely to be significant."In the interim, we expect competition to increase, driven by a challenging macro and price repositioning at key competitors."At 0820 BST, Debenhams shares were down 3.4% to 61.75p.