LONDON (Reuters) - Debenhams (DEB.L) sacrificed some of a planned improvement in profit margins to lure Christmas shoppers with cut-price deals, highlighting the pressure on Britain's retailers as they struggle with subdued consumer spending.
An industry survey on Tuesday said underlying British retail sales rose just 0.3 percent year-on-year in December. That is well below the rate of inflation, suggesting stores sold less in real terms, and increases the chances that the economy contracted in the last three months of 2012.
Debenhams, Britain's second-biggest department store chain after John Lewis JLP.UL, said it achieved record sales over the holiday season, driven by strong growth in online trading.
But the group said it had to step up promotions to win shoppers grappling with rising fuel prices, muted wages growth and uncertain job prospects. As a result, its gross profit margin for the 2012-13 fiscal year was likely to rise 10 basis points, rather than the previously assumed 20 basis points.
"Strong sales, but at a cost," Espirito Santo analysts said of the performance, adding the lower guidance on margins could reduce full-year profit forecasts.
Debenhams shares, which have doubled over the past year, were down 6.3 percent at 109.7 pence by 1145 GMT.
"Christmas shopping came very late, not only did customers have less money to spend, they've now become acclimatised to the new economic reality. They were extremely canny about how they spent their money," Chief Executive Michael Sharp said, describing the trading environment as the most competitive he had seen in his 37-year retail career.
Debenhams' figures came a week after John Lewis posted bumper Christmas takings and clothing retailer Next (NXT.L) raised profit guidance after a solid holiday season.
Sharp said Debenhams' performance, when compared with the survey from the British Retail Consortium, showed the firm was "definitely winning and somebody else is losing big time."
Britain's biggest clothing retailer Marks & Spencer (MKS.L) is forecast to report a decline in general merchandise sales when it posts quarter figures on Thursday.
Debenhams' sales at stores open over a year rose 5.0 percent in the five weeks to January 5, with like-for-like sales in the 18 weeks to January 5 - a big chunk of the firm's fiscal first half - up 2.9 percent.
That compared with analysts' average forecast for the first half to end-February of an increase of 2 percent.
As was the case with John Lewis, growth was boosted by strong demand online, with sales over the 18 weeks up 39 percent, ahead of the firm's expectations.
Online sales now account for 12.6 percent of Debenhams' total sales, up from 9.3 percent this time last year.
"Mobile was a huge story this Christmas, 36 percent of the traffic to the website came via mobile devices," Sharp said.
He dismissed comments from Next, which had said there were fewer promotions in the shops compared with Christmas 2011.
"I think they (Next) need to get out a bit more," he said.
"It's quite plain that the market was more promotional than last year. All our major competitors were doing non-like-for-like promotional activity."
Debenhams said it was on promotion for two more days in the 18-week period than in the previous year, including one-day specials offering discounts of up to 50 percent.
"Debenhams is suffering from the extremely promotional backdrop we saw pre-Christmas and are continuing to see," said Panmure Gordon analyst Jean Roche.
Sharp was confident Debenhams' like-for-like sales momentum would continue through the balance of the fiscal year, helped by its breadth of products, appeal to a wide range of customers and well-received marketing campaigns.
($1 = 0.6218 British pounds)
Reporting by James Davey; Editing by Kate Holton and Mark Potter