Ratings agency Moody’s has downgraded its long-term outlook for Debenhams and warned that the retailer’s profits are likely to come under even more pressure than expected given the “aggressive” pricing strategies of its peers.
Moody’s has changed the corporate family rating for Debenhams to Caa1, down from B2, and downgraded the ”probability of default” rating – which measures the relative likelihood that a company will default on one or more of its debt obligations – to Caa1-PD from B2-PD.
The outlook on the ratings has been placed as stable.
David Beadle, Moody’s vice president, credit officer and lead analyst for Debenhams, said: “Downgrading Debenhams to Caa1 reflects the challenges it faces to improve its credit quality during 2019 in order to achieve a timely and cost effective refinancing of its current debt facilities
“In the meantime however, we expect the company to at least stabilise profitability, materially improve net cash generation, and for its liquidity to remain adequate.”
It comes only two months after Moody’s downgraded Debenhams from B1 to B2, stating at the time that its weaker than expected profitability was “inconsistent” with a B1 rating.
In late October, the retailer revealed plans to close up to 50 stores over five years after posting the biggest losses in its history.
It made a £491.5m statutory pre-tax loss for the year to 1 September 2018 – down from a £59m profit the previous year. EBITDA fell by 27.5% to £157.3m. Underlying profit before tax more than halved, dropping 65.1% to £33.2m.
Moody’s said the results were in line with its expectations at the time of the August downgrade. However, it predicts that Debenhams’ profits will come under more pressure than previously anticipated in the run-up to Christmas season, as the competitive environment is highly challenging”.
It also expects the pricing strategies of Debenhams’ department store peers to remain ”very aggressive”.
“For example House of Fraser, which emerged from administration in mid-August, now plans to keep more stores open than envisaged under previous ownership and the rating agency expects it to be focused on reinvigorating its appeal to customers.”