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Why things could get even worse for this dividend dud

The share price of department store retailer Debenhams (LSE: DEB) was flat as a pancake this morning following the release of full-year results. Given the increasingly tough environment in which it operates (and the fact that its stock has more than halved in value over the last five years), existing holders must be breathing a sigh of relief. 

In the year to 2 September, gross transaction revenue rose 2% to a little under £3bn with like-for-like sales rising 2.1%. Sales of clothing fell but beauty and food were both up while digital sales increased by 12.7%. According to the company, it had made “good progress” with its new strategy (Debenhams Redesigned) including upgrading its mobile website, investing in digital beauty services provider blow LTD and — somewhat bizarrely — securing a partnership with Sweat! to trial gyms in three of its stores. Assuming you buy into CEO and former Amazon man Sergio Bucher’s vision of making Debenhams a destination for ‘Social Shopping’ (I don’t), this sort of progress is probably encouraging.

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Now the bad news. Despite the modest rise in sales, reported pre-tax profit tanked just over 44% to £95m. While this may have been in line with management expectations (and goes some way to explaining today’s lack of share price reaction), that’s hardly saying much. 

But falling profit is just one of a series of challenges faced by the company. Factor in long, inflexible rental agreements, a not-insignificant amount of debt on the balance sheet and the recent rise in inflation, you have a recipe for a very difficult future. Indeed, if things continue on this path I wouldn’t be surprised to see at least some reduction in the payouts being offered to investors. At 7.4% for the current year, the dividend yield is already ominously high.  

Trading on just seven times trailing earnings, Debenhams might look screamingly cheap but its increasingly scattergun turnaround strategy combined with the “uncertain” trading conditions in the run up to the hugely important Christmas period continue to make me bearish on the stock.

A better option

Those looking for a stark contrast to the woes of Debenhams should take a look at fashion/lifestyle retailer Ted Baker (LSE: TED) and, more specifically, its latest set of interim numbers.

In the 26-week period to 12 August, group revenue grew to £296m — 14% more than that achieved over the same period in 2016. Of this number, just under £218m came from its retail arm.

While the UK and Europe remain the company’s biggest markets, double-digit sales increases were seen in North America (18.8%) and Asia (29.5%), demonstrating just how much progress the £1.2bn-cap is making in growing its international presence. As well as opening new stores in the US, UK, China and France, the company oversaw licencee openings in countries as diverse as Australia, Dubai, Mexico and Turkey.

With e-commerce sales — now so important to the vast majority of retailers — also jumping by almost 44% to £42.7m, it’s no real surprise that the company was able to report a 17.8% rise in pre-tax profit to £25.3m. 

Trading at 22 times forecast earnings for the current year, it’s clear that recent performance has raised expectations and investors will need to dig deep to acquire its stock. Nevertheless, with analyst predictions of a 14% rise in EPS in 2018 and a growing dividend, I see Ted Baker as a far better option for investors at the current time.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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