The retailer posted profit before tax and adjusting items of £523.2mln for the year to the end of March 2019, down 9.9% on a year ago, as revenue declined 3% to £10.4bn on weaker sales in both the food arm and the clothing and home business.
Until recently, the food division has been the group’s saviour against persistent sluggish sales in the clothing and home unit.
But the food business has succumbed to the pressures of tough competition in the UK grocery market and subdued consumer confidence.
In an effort to cut costs and respond to the growing shift online, M&S is closing down a further 110 stores and has agreed a joint venture with Ocado Group plc (LON:OCDO) that will give the British high street retailer a home delivery service for the first time.
However, the Ocado joint venture won’t deliver M&S groceries until September 2020 while store closures are expected to hit food and clothing sales next year.
“The fact that sales are still expected to drop this year suggests the turnaround is still some way off,” said Ian Forrest, investment research analyst at The Share Centre.
“We continue to view the shares as a sell.”
M&S rights issue
Forrest said while changes are being made and the deal with Ocado earlier this year was a “positive move”, M&S is asking shareholders – who’ve seen the share price halve in recent years – to contribute through a rights issue.
M&S is planning a £601.3mln rights issue to fund its deal with Ocado. The company is paying £750mln for a 50% stake in the joint venture.
Ocado deal 'expensive'
Some analysts think M&S is paying too much to move its grocery business online.
“I’d still view the deal as an expensive entry into a sector – online groceries – that doesn’t make any money,” said Neil Wilson, chief market analyst at Markets.com.
“M&S basket sizes are tiny (c£14) so they need people to change their habits entirely and think M&S is the place for their big weekly shop, which they won’t.
“It’s better than standing still but no silver bullet. Exposure to the UK high street is a major drag that won’t get any easier.”
M&S needs to deliver on restructuring plan, says analyst
Wilson added that he thinks the retailer is “disappointing on several fronts” and that doubts about its turnaround remain.
He pointed out the cost of restructuring is high so M&S will need to deliver on its plan or its financial position will start to come under greater scrutiny.
M&S took a £222mln charge related to its store closure programme as part of its transformation plan. That’s on top of the £320mln hit it took from store closures last year.
“These costs are not insignificant. Capital expenditure is meanwhile rising,” Wilson said.
Capital expenditure is forecast to increase to between £350mln and £400mln in fiscal year 2020, compared to £234.9mln in 2019. The rise is largely a result of increased investment in stores and clothing and home logistics capacity.