By Kate Holton and Neil Maidment
LONDON, Dec 31 (Reuters) - Debenhams warned of asharp fall in profit on Tuesday after big discounts failed tospur a surge in last-minute Christmas shopping, sending a shiverthrough weaker British retailers.
In an ominous sign for rival Marks & Spencer,Britain's second-largest department store group said it wouldnow miss analysts' first-half profit forecasts and would have tocut prices even further to clear stock.
A sea of red sale signs across the country's high streets inDecember illustrated retailers' battle for cost-consciouscustomers in a tentative economic recovery and as more peopleshop online.
Their efforts were hampered by storms which battered Britainand kept many shoppers at home on some of the biggest tradingdays of the year.
M&S, Britain's biggest clothing retailer, made the rare moveof slashing 30 percent off all clothing in the run up toChristmas prompting fears it too had suffered in the criticaltrading period.
Debenhams' unscheduled trading statement sent shares in thefirm down 12 percent, wiping 120 million pounds off its marketvalue. Shares in M&S fell 2 percent, while more resilientretailers held steady.
"The market was highly promotional in the run up toChristmas and we responded to these conditions to ensure ouroffer was competitive," Debenhams Chief Executive Michael Sharpsaid.
Debenhams has long used promotions to drive sales, offering50 percent reductions in the run up to Christmas on some items.But the company said it had to offer particularly deep discountsthis year to keep up with competitors.
"This extremely difficult environment has inevitably had animpact on both our sales and profitability," Sharp said.
The company said it now expected profit before tax for thefirst half of its financial year to March to be in the region of85 million pounds ($140.47 million), below analysts' forecastsof 112 million pounds, according to Thomson Reuters data.
That would be a 26 percent fall from a year ago.
"It looks like they've obviously had a very challengingChristmas period," Numis analyst Andrew Wade said. "..we don'texpect others to be warning in such a dramatic fashion."
HIGH-STREET PAIN
Marks & Spencer is due to give a trading update on Jan. 9and weak figures would pile more pressure on Chief ExecutiveMarc Bolland whose recovery plan around higher quality and morestylish fashions has so far failed to kick-start sales.
Employee-owned John Lewis is due to report tradingon Thursday while Next, Britain's second-biggestclothing retailer, is due to publish figures on Friday. Both arestrong competitors for Debenhams, which has a weaker onlineoffering.
Research this month by PwC found 72 percent of 100 high-street retailers were on sale or advertising promotions.
Data from Experian for last week showed there was a 13.9percent decline in footfall, or the number of shoppers who wentinto stores, while those who shopped online on Dec. 26 were up15 percent on last year, marking the country's biggest ever dayfor online shopping.
In the 17 weeks to Dec. 28, Debenhams reported like-for-likesales growth of 0.1 percent as demand for gifts, beauty and homeproducts just offset weak demand for clothing. The deepdiscounting is likely to knock its gross margin for the firsthalf by between 80 and 100 basis points, it said.
Debenhams said in light of the tough trading it would ceaseits share buyback programme.
Marks & Spencer (MKS)
Next (NXT)