Marks & Spencer PLC (LON:MKS) shares fell on Friday as though it is seeing strong trading in its food business, the retailer said it expects a tough period for clothing due to the coronavirus lockdown.
In an update on trading, the FTSE 250-listed group said profits this year to March will at best be at the lower end of its £440-460mln range but might be lower.
READ: Ocado joint venture shuts down app due to coronavirus panic buying
The company added that in order to preserve cash, the final dividend has been suspended saving £130mln, while the recent business rates holiday announced by the government will save the retailer a further £180mln.
M&S also said it is preparing to close some stores temporarily, but added that its move online with Ocado PLC (LON:OCDO) will provide some resilience.
Going forward, the retailer expects clothing and home revenue to be under heavy pressure in the next 3-4 months with margins to be severely impacted by sales of unsold stock. Orders of new lines are being cut back where it can and M&S said it is not assuming normal trading will return in the Autumn.
By contrast, it said, the food business should trade profitably throughout the next few months. While it has yet to see the stockpiling surge reported at the other supermarkets due to its focus on chilled and fresh, a shift to home buying should benefit sales in the months ahead.
The group said its International business will see significant reductions in sales due to country lockdowns and store closures.
As part of other measures to save cash, the company added, its capital expenditure budget has been slashed to £80mln from £400mln; a pay freeze has been imposed with £100mln to be taken out of stocks.
M&S noted that it has an undrawn £1.1bn revolving credit facility and current cash balances of £185mln with total available liquidity of £1.34bn.
M&S faces some very real challenges
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown commented: “COVID-19 has the potential to derail M&S’ Clothing & Home division for many months. These are uncertain times for retailers, but this is going to be a particular challenge for M&S as the Clothing & Home business has been struggling for a while. With lockdowns and closures disrupting trading in its international markets too, the pandemic situation is likely to really hurt the group’s top line. That will then feed down to weaker margins. If less stock is shifted and the group’s left with piles of inventory it will need to slash prices in order to sell it at a later date."
"On the plus side," she added, "M&S has a bit of protection because its clothing offering is less seasonal. As a place we go to for core wardrobe items, rather than throw away fashion, sales could be slightly more defensive than other players. That probably won’t offer enough mitigation to offset the sharp decline in footfall that’s expected though."
The analyst continued: "The food business is faring better. At the moment food hasn’t seen the major uplift as other supermarkets because of M&S’ bigger focus on fresh food. However, as more of us are forced to stay at home sales should continue to benefit from the group’s strong offering of home-dining options. The pandemic also means the joint venture with Ocado has come at an interesting time.
"From the Autumn M&S items will be available online, which could allow it to benefit from a shift to online shopping. Demand for Ocado has been so strong in recent days it was forced to take its app offline. All-in-all there are simply too many unknowns to predict what will happen. In our view M&S faces some very real challenges, but also opportunity, in the months ahead.”
M&S shares were down 4.5% at 110.80p on Friday.
-- Adds analyst comment, share price --