Nov 5, 2014
Hope for women's clothing as M&S profits rise
Nov 5, 2014
LONDON, United Kingdom - A glimmer of improvement in women's clothing helped British retailer Marks & Spencer post the first rise in first-half profit in four years although analysts said it was too soon to declare a turnaround.
Shares in the high street stalwart, down 17 percent over the last year, jumped more than 8 percent on Wednesday as results showed cost cutting and rising sales of upmarket food offset a deepening decline in homewares and overall clothing, which account for around half of all sales.
But womenswear purchases rose 1.3 percent in the first five months of the financial year ending Sept 27, with Chief Executive Marc Bolland saying the revamped ranges had won praise in the fashion press and drawn female shoppers back to stores.
Sales plummeted in September, however, with unseasonably warm weather keeping high-margin winter items such as coats, knitwear and boots on shop shelves.
Analysts noted the green shoots but said it was too soon to say whether Bolland, who raised the group's profit margin forecast for non-food products, lowered cost growth guidance and upped the dividend payout, was finally delivering a turnaround.
"Beyond the flagship stores, many still feel like museums where older people go to browse black slacks," said Phil Dorrell, director of the retail consultancy Retail Remedy.
"But Marc Bolland may have done just enough to avoid the rocks - for now."
Bolland has tried to improve the quality of womenswear by working closely with suppliers, reducing the number of sub-brands and cutting promotions but non-food sales from stores open more than a year still fell for the 13th quarter in a row.
"We want to bring out more style and quality, that has certainly worked for us in five months out of the six," he said on BBC Radio. "Consumers are coming back to us and saying: 'M&S has got the style back.'"
Bolland, poached from grocer Morrisons in 2010, has spent over 2.3 billion pounds ($3.7 billion) to address decades of under-investment, overseeing the revamp of products, stores, a website, logistics and marketing but for the first time, M&S earned less in the year ended March than rival Next.
M&S said sales of general merchandise products, spanning clothing, footwear and homewares, at stores open over a year fell 4.0 percent in the 13 weeks to Sept. 27, its fiscal second quarter.
That compared with analysts' average forecast of down 3.7 percent and a first quarter drop of 1.5 percent.
M&S said "unseasonal conditions" in September knocked about 2.5 percent off its second quarter non-food sales. Those conditions had continued into October.
Last week the warm weather forced Next to cut its profit forecast, while fashion firm SuperGroup issued a profit warning. On Tuesday discount chain Primark said it was unconcerned by the weather, though even its sales growth has slowed.
Many British retailers also face a challenging environment as shoppers change their habits, turning away from traditional stores towards the internet and discount chains as wages are subdued meaning disposable income is tight.
However, M&S said its gross profit margin in general merchandise rose by a better-than-expected 150 basis points in the first half, benefiting from better prices from suppliers and fewer discounts in the shops. The company also said it was reining in costs.
As a result, first-half pretax profit before one-off items was 268 million pounds, ahead of analysts' average forecast of 252 million pounds and up from 262 million pounds last year.
M&S also raised its guidance for non-food gross margin for the full 2014-15 year to growth of 150-200 basis points from growth of 100 basis point previously, and lowered its operating cost guidance to a rise of 3.5 percent from 4 percent previously.
"Those trends are supportive of one of the bull cases that was out there on M&S which was about improved cash flow and the prospect of greater shareholder returns," one major M&S investor told Reuters.
"There's the first glimmer of that being possible in these results. But M&S are still flagging a very tough environment and I don't think anyone's expecting sales to roar away."
The group ended the first half with free cash up 73 million pounds and raised its interim dividend by 0.2 pence to 6.4 pence. It said it would update on further potential shareholder returns when it publishes full-year results in May. That could mean special dividends or share buybacks.
M&S's food business, which contributes over half of group sales, is performing better than clothing, benefiting from its strategy to focus on quality and innovation.
Its like-for-like sales rose 0.2 percent in the second quarter -- a 20th consecutive quarterly increase and in line with analysts' average forecast.
Food gross margin was up 25 basis points over the first half. The company said it now planned to open 200 of its "Simply Food" stores over three years, up from 150 previously.
M&S's online sales fell 4.6 percent in the second quarter having plunged 8.1 percent in the first quarter due to teething problems switching to a new website. It forecast a return to growth in the Christmas trading period.
Shares in M&S were up 35.6 pence at 440 pence at 13:25 GMT, valuing the business at 7.2 billion pounds.
1 US dollar = 0.6263 British pound
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