viewMarks and Spencer Group PLC

Marks & Spencer says transformation "running at pace" but sales still falling

“For the first time we are beginning to see the potential from the far-reaching changes we are making,” said chief executive Steve Rowe

Marks and Spencer Group PLC - clothing
Clothing & Home sales continued to fall but there were some signs of progress

Marks & Spencer Group PLC (LON:MKS) reported a further decline in profits in the first half of the year but said its transformation plan was now “running at a pace and scale not seen before”.

The retailer’s revenue fell 2.1% to £4.9bn in the 26 weeks to 28 September and underlying profit before tax (PBT) dropped 17.1% to £176.5mln, which was better than the analyst consensus of £174mln.

READ: M&S still failing to reach mainstream customers

Not helped by stock issues that led to the firing of the division’s boss three months ago, the Clothing & Home segment continued its seven-year decline with a 5.5% decrease in like-for-like (LFL) sales, though this was offset by LFL sales growth from Food of 0.9%.

Reported PBT rose 51.5% to £153.5mln due to lower adjustments than the same period last year, with earnings per share up 74.3% to 6.1p but the dividend was slashed by 40% to 3.9p as the group had warned.

Chief executive Steve Rowe, who took control of the clothing business after the ‘jeansgate’ promotion balls-up in the summer, said the turnaround was “still in the early stages, but we are clear on the issues we need to fix”, although it is coming up to four years since he was promoted to M&S's top job.

On the plus side, he was able to point to a food business outperforming the market and said that as part of February's joint venture agreement with online grocer Ocado PLC (LON:OCDO), the moving of the M&S food range onto the platform was “on track”, though the current M&S.com business saw revenue rise just 0.2% in the half-year.

Seeing potential

“For the first time we are beginning to see the potential from the far-reaching changes we are making,” Rowe said.

“We have taken decisive action to trade the ranges with improved availability and shorter clearance periods. In some instances dramatic sales uplifts in categories where we have restored value, style and availability illustrate the latent potential and enduring broad appeal of our brand. Our cost reduction and store technology programmes are on track,” he added.

Possible rays of light were visible from reports of improved sales performance in October from Clothing & Home and from action to “drive value, broaden appeal and accelerate innovation” in Food seeing volume growth of 3.3% in the second quarter.

While the second half is expected to remain “challenging”, with gross profit margin in clothing trimmed lower, the anticipated effects of store closures, operating cost reductions and capital expenditure are all expected to be better than previously guided, the group concluded.

Market reaction

The shares, which last month were trading not far off all-time lows, sparked up 5% to 191.7p in early trading on Wednesday, with expectations having been lowered last month that efforts to shake up clothing and home had fallen "18 months" behind.

Broker Liberum said adjusted PBT was "broadly in line" with consensus but continues the declining trend and masks other concerning areas. 

"Of key importance for us", Liberum analysts said, was the 69% year on year reduction in free cash flow generation to circa £92m, with a working capital outflow of £67mln as management noted a higher build-up of seasonal stock as a key contributing factor.

"There is clear risk attached to this and the ability to clear this at close to full price margin will be a critical factor in C&H performance. Track record, and the current highly promotional environment, does not make us overly confident here and could place further pressure on gross margin, over and above management’s more pessimistic guidance today."

"Grim," was the view of Neil Wilson at Markets.com of the clothing business. "Phrases like ‘in a declining market, the business underperformed’ hardly inspire."

He said the string of management departures "points to the trouble... but progress was too slow. But if it doesn’t pay off, will [Rowe's] head be the next to roll?"

"Guidance is ok but rightly very cautious. Looks like they’ll delay some store closures and spend a bit less. Clothing & Home sales now seen falling 2% versus 3% previously guided. Margins are therefore seen even lower at -25 to -75 bps. But it’s a long way from being out of the trough. LFL sales growth probably won’t be seen until 2021."

Quick facts: Marks and Spencer Group PLC

Price: 101.05 GBX

Market: LSE
Market Cap: £1.97 billion

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