First half sales fell at Marks & Spencer (MKS) as demand for food and clothing was hit by disruption from the latest attempt to overhaul the high street bellwether.
Despite delivering adjusted pre-tax profit of £223.5m, up 2% year-on-year and a beat versus the £208m consensus, shares in the embattled retail giant reverse 3.3% to 292.6p this morning.
Investors are spooked not only by falling food sales, but also by a soft outlook, Marks & Spencer now ‘expecting little improvement in sales trajectory’ this year.
SOGGY SALES SHOWING
Sales were down 3.1% to just under £5bn in the 26 weeks ended 29 September amid tough market conditions and store closures.
Yet while the 1.1% like-for-like sales decline in the Clothing & Home division was less than expected, the pace of decline in the Food division has clearly unnerved the market.
Food like-for-like sales fell 2.9% due to the timing of Easter, fewer promotions and price cuts, but also reflecting fierce competition. Indeed, Shore Capital cuts its year to next March pre-tax profit forecast by 3% to £528m to account for the disappointing food performance.
ROWE'S RINGING THE CHANGES
Marks & Spencer has been in need of a major overhaul for years - chairman and famed troubleshooter Archie Norman characterised the business as a ‘burning platform’ at July’s AGM - and CEO Steve Rowe is certainly delivering change.
As Rowe comments today: ‘Against the background of profound structural change in our industry, we are leaving no stone unturned and reshaping our business, its organisation and culture.’
Rowe says this first phase of his ‘restoring the basics’ transformation programme ‘is about rebuilding the foundations of the future M&S and we are judging progress as much by the pace of change as the trading outcomes. Already, we have reorganised into a family of strong businesses in the biggest change to our structure for decades.’
With a new management team in place, he argues ‘M&S is becoming a faster, more commercial and more digital business’, and a leaner, more efficient one too. Rowe says his charge is making good progress in generating cost savings of at least £350m by 2020/21.
BLEAK OUTLOOK
Nevertheless, there’s also a bleak outlook from Marks & Spencer, clearly feeling the heat from an array of competitors.
Turning to full year guidance for 2018/19, management warns:
‘Trading conditions remain challenging and the headwinds from the growth of online competition and the march of the discounters remain strong in all our markets. Therefore, as we embark on the difficult early stages of transformation we are expecting little improvement in sales trajectory.’
THE EXPERTS’ VIEW
Liberum Capital maintains its ‘sell’ rating with a 250p price target, explaining the ‘need to service customers on two fronts, in store and online, sees an increase in cost/sales resulting in group EBIT margins falling from 8.2% in 2012 to 5.5% in 2020, on our estimates’, while also arguing ‘the clothing market for M&S will continue to be squeezed by fast fashion, online, brands and value.'
On the Food side, the broker highlights ‘longer term pressures from the likes of Amazon-Go and the rise of takeaway platforms such as JustEat and Deliveroo, especially in London. Ongoing structural pressures mean that any path to recovery for M&S continues to look long and uncertain.’
Russ Mould, investment director at AJ Bell, comments: ‘The world’s most frustrating recovery story continues to limp along with no end in sight for when the business will truly be fixed.
‘Food has been the weakest part over the past six months with a 2.9% decline in like-for-like sales, partially blamed on reducing prices and removing “complex and confusing” promotions. Strategically that looks to be the correct decision, up to a point.
‘Marks & Spencer needs to live up to its reputation of quality products while also being more competitive on pricing. However, one has to wonder if there is a risk in the business swinging the needle too far towards budget territory.
‘As for clothing, the decision to reduce the number of options looks wise as long as it doesn’t forget its unique selling point, namely stocking a wide range of different sizes per line.
‘It feels like the restructuring plans have been in place for a long time, yet each trading update sees management talk optimistically about the future rather than showing solid proof of progress. This truly is a juggernaut that will take a very long time to turn around.'
