viewMarks and Spencer Group PLC

M&S profits plunge on store closure costs but shares bounce higher as results beat forecasts

M&S has accelerated its store closure programme as it addresses the challenges in the retail market

Clothing and home sales dropped 1.9% on a like-for-like basis

Marks and Spencer Group PLC (LON:MKS) saw its shares top the FTSE 100 leader board on Wednesday, bouncing higher after a 62% slump in annual pre-tax profit on the back of restructuring costs and weaker margins in the food business largely matched analysts' forecasts.

The FTSE 100-listed high street retailer reported a pre-tax profit of £66.8mln for the year to the end of March 2018, down sharply from £176.4mln a year earlier, mainly due to a one-off charge of £321.1mln for its store closure programme.

M&S announced on Tuesday that it was accelerating its reorganisation with the closure of 100 UK stores by 2022.

READ: M&S confirms 100 store closures ahead of full year results as it moves sales online

Excluding the restructuring charge, the stores group's adjusted pre-tax profit was down 5.4% to £580.9mln from £613.8mln last year, weighed by a 140 basis points drop in the food gross margin as a result of a weaker pound pushing up input cost inflation. 

But M&S's underlying profit was better than the £573mln market forecast, sending its shares 5.7% higher to 308.5p in afternoon trading. 

Food margins are expected to remain under pressure in fiscal year 2019, with the company predicting a decline of up to 50 basis points.

However, M&S improved its gross margin in the clothing and home division for the year by 50 basis points. For 2019, the group expects the gross margin to be up to 50 basis points higher.  

Total revenue up but like-for-like UK sales fall 

Group revenue increased 0.7% to £10.7bn from £10.6bn as growth in food sales offset another decline in clothing and home. Total UK sales grew 1.8% but on a like-for-like basis declined 0.9%.

Food revenue increased 3.9% as M&S opened 62 new Simply Food stores. But like-for-like food sales dropped 0.3% with the group blaming intense competition.

Clothing and home revenue fell 1.4% and like-for-like sales decreased 1.9% amid a tough retail market. Heavy snowfall in March from the so-called ‘Beast from the East’ also had an impact on sales as consumers remained indoors in March.

Addressing the challenges in retail

M&S warned that an increasing shift in consumer behaviour towards online shopping for fashion, growth in home food delivery and competition from discounters Aldi and Lidl “all amount to threats to our business and market position”. 

“These, together with a challenging UK consumer market, mean that we have to modernise our business to ensure we are competitive and reignite our culture. Accelerated change is the only option,” it said.

M&S said its store closure programme would reduce costs by at least £250mln and provide a “platform for growth in later phases of our plan”.

The group plans to move about a third of its sales online and reduce the floor space devoted to its struggling clothing and home division. It has also scaled back the number of Simply Food stores it planned to open this year by 15.

The company said it expects to reduce floor space for clothing and home by 5% in 2019 while the space dedicated to food will be broadly level with the previous year.

M&S is also improving its website and investing in its e-commerce capacity, including a site at Castle Donington, with the aim of doubling its online share of clothing and home sales to more than 33%.

In support of these changes, M&S expects capital expenditure of £350-400mln in 2019 but sees UK costs falling by up to 1% due to cost efficiencies and lower depreciation.

"There are a number of structural issues to address and we are taking steps towards fixing these,” said chief executive Steve Rowe.

“The new organisation will largely be in place by July and the team is now tackling transforming our culture to make M&S a faster, lower cost, more commercial, more digital business. This is vital as we start to leverage the strength of the M&S brand and values across a family of businesses to deliver sustainable, profitable growth in three to five years."

M&S dividend yield 'attractive', says analyst

M&S left its dividend unchanged at 18.7p.

Free cash flow before adjusting items fell by 5.4% to £580.9mln from £613.8mln but net debt fell by 5.5% to £1.83bn from £1.93bn.

"For investors a dividend yield of over 6% is an attractive stopgap, but at the moment Steve Rowe’s promise to make M&S special again requires a leap of faith," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

He added: "M&S is simply struggling to make progress in a world where a compelling mobile app is every bit as important as a presence on the high street, and considerably less expensive."

Liberum maintained a 'sell' rating on the stock, saying the full year results "leave us unable to see any evidence yet of progress on the transformation strategy". The company has "kitchen sinked" with huge exceptional items resulting from its store closure programme, the broker said.

"We make no change to our below consensus earnings at this early stage and we still think the long entrenched working practices at M&S leave it at a disadvantage vs its peers," Liberum added. 

"We maintain our preference for strong brands, with distinct market positions and those that have well invested systems and infrastructure to drive online."

-- Updates share price -- 

Quick facts: Marks and Spencer Group PLC

Price: 97.22 GBX

Market: LSE
Market Cap: £1.9 billion

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