--- Updates and writes through with analyst comment, share price and more detail ---
Marks & Spencer posted another fall in clothing sales on Wednesday, but its shares rose as analysts said its turnaround drive was showing signs of working.
The high street chain, which has been battling to revive demand for its fashion ranges, said total general merchandise (GM) sales fell 0.4% and by 1.2% on a like-for-like basis.
It blamed the drop on unseasonal conditions and a decision to slash discounting in favour of a focus on full-price sales.
Shares in the group rose more than 3% to a two-month high, up 16p at 536.5p, as investors welcomed the reduction in price-cutting, which boosted margins.
They also took heart from the company's decision to raise its full-year margin guidance to between 200 and 250 basis points and a 6.3% rise in the interim dividend to 6.8p.
Sales rose 1.4% to £5bn while underlying pre-tax profit lifted 6.1% to £284mln.
CMC Markets analyst Jasper Lawler said: "Investors reacted positively to the retailer’s refusal to discount its clothing lines."
As fashion sales have sagged, speculation has grown that chief executive Marc Bolland's days at M&S could be numbered.
Bolland has faced criticism for seemingly allowing the clothing business to drift while managing to maintain shoppers' appetite for the chain's upmarket food ranges.
He responded earlier this year by shaking up management. Former clothing boss John Dixon left in July and womenswear boss Frances Russell departed in August.
Bolland said in the results statement: "Despite some improvement in consumer confidence, conditions continue to be challenging in both UK and international markets.
"Our short-term priorities remain the same: food sales growth, GM gross margin improvement, improved GM performance and strong cash generation."
The market's reaction to Wednesday's results appeared to show that investors are giving him the benefit of the doubt, for now at least.
Analysts said food sales were still propping up the overall performance and Christmas would be key.
AJ Bell investment director Russ Mould said: "Clothing sales have fallen for 16 of the past 17 quarters, but margins have improved as M&S eschewed discounting in the first half and raised full-year guidance for the division’s gross margins.
"The Christmas/New Year period will, as usual, be crucial to whether these goals are achieved.”
Investec said M&S had not had the easiest of times in the last six months due to the wet summer, but the broker added that the "increased flexibility in M&S’ business model" stood out, enabling it to achieve pre-tax profits that were 5% ahead of consensus, driven by better general merchandise gross margins.
The broker's Kate Calvert said: "Management appears to be more confident on the general merchandise gross margin opportunity overall. With weak comparatives ahead, risk on numbers remains on the upside.
"Valuation does not reflect self-help opportunities or cash generation. We reiterate our buy."
Head of equities at broker Hargreaves Lansdown, Richard Hunter, said the move to focus on full-price sales "buys the company some time to rediscover the magic potion which may tempt younger shoppers into its stores".
"Elsewhere, international sales have dipped once more against currency head winds, whilst the accompanying outlook comments are fairly sombre," he said.
"Even so, and despite some more recent weakness, the share price has had a good run, having risen 29% over the last year, as compared to a 2% dip for the wider FTSE100.
"With the potential of brighter times on the horizon, the market consensus of the shares as a cautious buy should at least consolidate."
M&S said group pre-tax profit was down 22.7% at £216mln. Online business was a bright spot, with M&S.com sales rising 34.2%. The food business boosted sales by 3.3% and 0.2% on a like-for-like basis.
The company's M&S Bank faced charges of £27.5mln related to provisions for insurance mis-selling, while costs of closing and revamping stores weighed.
The chain opened 32 Simply Food shops and said their performance was ahead of expectations. International sales were down 0.9% to £506.6mln.
Adverse movements in the euro exchange rate took their toll on the group's self-operated international arm.
Tough economic conditions, particularly in the Middle East, also continued to affect the group's franchise business.