By Kate Holton and Neil Maidment
LONDON (Reuters) - Debenhams warned of a sharp fall in profit on Tuesday after big discounts failed to spur a surge in last-minute Christmas shopping, sending a shiver through weaker British retailers.
In an ominous sign for rival Marks & Spencer, Britain's second-largest department store group said it would now miss analysts' first-half profit forecasts and would have to cut prices even further to clear stock.
A sea of red sale signs across the country's high streets in December illustrated retailers' battle for cost-conscious customers in a tentative economic recovery and as more people shop online.
Their efforts were hampered by storms which battered Britain and kept many shoppers at home on some of the biggest trading days of the year.
M&S, Britain's biggest clothing retailer, made the rare move of slashing 30 percent off all clothing in the run up to Christmas prompting fears it too had suffered in the critical trading period.
Debenhams' unscheduled trading statement sent shares in the firm down 12 percent, wiping 120 million pounds off its market value. Shares in M&S fell 2 percent, while more resilient retailers held steady.
"The market was highly promotional in the run up to Christmas and we responded to these conditions to ensure our offer was competitive," Debenhams Chief Executive Michael Sharp said.
Debenhams has long used promotions to drive sales, offering 50 percent reductions in the run up to Christmas on some items. But the company said it had to offer particularly deep discounts this year to keep up with competitors.
"This extremely difficult environment has inevitably had an impact on both our sales and profitability," Sharp said.
The company said it now expected profit before tax for the first half of its financial year to March to be in the region of 85 million pounds ($140.47 million), below analysts' forecasts of 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 challenging Christmas period," Numis analyst Andrew Wade said. "..we don't expect others to be warning in such a dramatic fashion."
Marks & Spencer is due to give a trading update on January 9 and weak figures would pile more pressure on Chief Executive Marc Bolland whose recovery plan around higher quality and more stylish fashions has so far failed to kick-start sales.
Employee-owned John Lewis is due to report trading on Thursday while Next, Britain's second-biggest clothing retailer, is due to publish figures on Friday. Both are strong competitors for Debenhams, which has a weaker online offering.
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 13.9 percent decline in footfall, or the number of shoppers who went into stores, while those who shopped online on December 26 were up 15 percent on last year, marking the country's biggest ever day for online shopping.
In the 17 weeks to December 28, Debenhams reported like-for-like sales growth of 0.1 percent as demand for gifts, beauty and home products just offset weak demand for clothing. The deep discounting is likely to knock its gross margin for the first half by between 80 and 100 basis points, it said.
Debenhams said in light of the tough trading it would cease its share buyback programme.
($1 = 0.6051 British pounds)
(Additional reporting by Christine Murray; Editing by Erica Billingham)