Markets: Punting in the City - Debenhams

Consumers are now frantically scribbling their Christmas shopping lists, and investors can make a healthy return if they correctly predict where the festive pound will be spent. This is a crucial time of year for most retailers, so it is worth looking over the sector to see who will be the likely winners and losers.

Unfortunately, without psychic powers it is hard to predict how they will rank. But Debenhams, the department store retailer, should not be under-estimated. From the end of 2000, the share price more than doubled, reaching a peak of 480p in June last year. However, in July this year Debenhams warned that its womenswear wasn't selling well and that stocks were too high. Sentiment slumped along with the share price. But since the final results, showing turnover up 5 per cent to pounds 1.7bn and pre-tax profits up 5.1 per cent to pounds 153m, shares have recovered to Friday's closing price of 325p.

It will be a competitive Christmas for Debenhams, particularly as a recovering Marks & Spencer is putting a lot of effort into advertising, leading to concerns that it is taking market share from its rival. However, this is reflected in Debenhams' share price. According to stockbroker SG Securities, Debenhams is rated at 9.8 times this year's earnings, compared to Marks' 13.6 times earnings. But this discount doesn't appear to be wholly justified.

A most attractive aspect of Debenhams is its property portfolio. It owns about a third of its sites, including the Oxford Street store in central London. This was last valued in 1995, when commercial property was far cheaper than now. Dresdner Kleinwort Wasserstein estimates the pounds 321m on the balance sheet could be worth pounds 500m at today's prices. No immediate revaluation is planned but this hidden treasure will cheer investors. Debenhams is also in the middle of a share buyback programme that should support the share price.

On the negative side, the company has not had a healthy cashflow over the past two years, which it puts down to a store expansion programme. However, with Debenhams claiming a 20 per cent return on the new stores, cashflow and profits should bounce back.

Prospective share buyers should watch for news on spending levels and monitor the buzz on the different high street retailers. There is also a possibility that consumer spending will fall if the housing boom proves unsustainable. But such risks would be worth taking if punters successfully spot a company that has a merry Christmas this year.

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