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Department store chain Debenhams has warned that its like-for-like sales have dropped by five per cent over the past year.

In a trading update the company said it also expected to report a fall in its gross margin for the 52 weeks ending September 1st, with the group warning that the retail environment is likely to remain challenging in the short-term.

However company bosses stress that Debenhams is expected to report pre-tax profits before exceptional items in line with market expectations.

Debenhams, which has been facing tougher competition from high street rivals such as Next and Marks and Spencer, said that its gross margin for the full year was expected to decline by around 0.9 per cent.

The company said that the need to sell off old stock ahead of the arrival of the new season's merchandise had required an increased markdown in prices and added to the pressure on margins.

But Debenhams, which has opened two new department stores in its home market over the past year, believes that the actions it has taken will mitigate the impact of difficult trading conditions in the retail sector.

"Macro economic factors suggest that the retail environment will be more challenging in the short term… nonetheless we believe that the actions we have implemented across the business position us well for the new financial year," said Debenhams chief executive Rob Templeman.

He stressed that Debenhams was confident that improvements made to its stores and visual merchandising, along with product developments and a new marketing campaign, would "ensure that the company has a strong platform from which to build".

In the wake of ongoing turmoil on the world's financial markets and a series of past interest rate rises, several leading retailers have warned in recent days that they face tough times ahead.

Debenhams will report its preliminary results for 12 months to September 1st on October 23rd.