By James Davey

LONDON (Reuters) - Department store group Debenhams forecast a further rise in profit margin in 2010 despite the tough economic outlook as it posted a small rise in sales and a profit increase in the run-up to Christmas.

Photo: www.debenhams.com

"Looking forward, with the rise in VAT (sales tax) and a general election pending, the consumer environment remains uncertain," chief executive Rob Templeman told reporters on Tuesday 12 January, echoing recent comments from a raft of other retailers.

"Against the backdrop of a tough economic outlook we believe that focussing on self-help levers such as margin expansion alongside sales is imperative," he said.

The firm, which trades from over 150 stores in Britain and Ireland and more than 50 franchised outlets overseas, is moving space away from low margin concessions into higher margin own bought merchandise. The strategy is driven by the expansion of its exclusive "Designers at Debenhams" ranges by fashion setters such as Matthew Williamson and Julien Macdonald.

Two new ranges Principles by Ben de Lisi and H! by Henry Holland will be launched next month.

Debenhams said sales at stores open at least a year increased 0.1 percent in the 18 weeks to January 2 year-on-year.

That compares with analyst expectations ranging from a fall of 2 percent to a rise of 1 percent.

The firm estimated the switch to own bought from concession sales had impacted like-for-like sales growth by 1.5 percent.

But even allowing for this analysts said the performance was one of the less upbeat seen to date and some way behind rivals John Lewis and House of Fraser.

"We continue to have reservations about the move to a more extreme high-low pricing model in a more difficult trading environment," said analysts at Credit Suisse.

Shares in Debenhams have more than doubled over the last year, helped by a 323 million pounds ($520.2 million) fundraising in June which ended worries about its debts. These had dogged the firm since its stock market return at 195 pence a share in 2006.

The stock was down 4.2 percent at 74.7 pence at 10:16 a.m. British time valuing the business at about 942 million pounds.

Debenhams' gross transaction value was 1.6 percent higher, with gross margin ahead of the year to end-August 2010 guidance of up 50-60 basis points, which remained unchanged.

The retailer said it had repaid a further 75 million pounds of gross debt and bought back a further 17 million pounds of debt in the market since October.

Debenhams raised its full-year capital expenditure guidance to 115 million pounds. It will accelerate its store refit programme with schemes planned for stores in Manchester, Glasgow and Bristol.

Templeman said the firm will also look for more "accretive bolt-on acquisitions" following November's purchase of Danish department store chain Magasin du Nord.

Separately on Tuesday 1 January a survey showed UK retail sales in December rose 4.2 percent year-on-year, while Tesco, Britain's largest retailer reported better-than-expected Christmas sales.

(Editing by Julie Crust and Mike Nesbit)