News Column

Marks & Spencer Posts Third Straight Drop In Annual Profit

May 20, 2014

Rowena Harris-Doughty

LONDON (Alliance News) - British high street chain Marks and Spencer Group PLC Tuesday reported its third consecutive annual drop in a closely-watched profit measure, as the retailer continued to struggle to entice customers to buy its clothing range and general merchandise offering against better performing rivals like Next PLC despite heavy promotional activity.

The retailer said it remained cautious about the outlook for the business due to competition and promotional pricing in the UK retail sector, although it has seen some improvement in consumer confidence.

The retailer has now come to the end of a three-year plan to turnaround the business. However, it has failed to turnaround its general merchandise business despite the success of its food offering. Next overtook M&S in terms of underlying pretax profit for the first time last year.

M&S reported a pretax profit of GBP580 million for the 52 weeks ended March 29, compared with GBP547.2 million a year earlier, due to lower finance costs, but its underlying pretax profit, which strips out exceptional items and fair value movements, fell to GBP623 million, from GBP648.1 million. That was slightly above analysts expectations for up to GBP620 million.

Revenue actually rose to GBP10.31 billion, from GBP10.03 billion a year earlier, driven by its successful food business and improvements online, while general merchandise and clothing sales also picked up in the fourth quarter. Total UK sales improved 2.3%, with food sales up 4.2%, and general merchandise sales flat.

On a like-for-like basis, UK sales were up 0.2%, with food sales growing 1.7%, and an improved general merchandise performance, down only 1.4% and an improvement on previous years.

However, the company's UK general merchandise gross margin was down 110 basis points at 50.7% as a result of increased cost of promotions and markdowns. That compared with an 80 basis points increase for the food business.

By comparison, Next had reported a 12% increase in pretax profit excluding exceptional costs to GBP695.2 million in the year ended January 24, and a 5.4% increase in revenue excluding VAT, driven by its online business.

M&S also left its dividend for its last financial year unchanged at 17.0 pence, while Next raised its full year dividend by 23%, and last month announced that 20,000 employees would received a shares of Chief Executive Simon Wolfson'sGBP4 million share bonus.

For the current financial year, M&S said it expects gross margin in general merchandise to grow around 100 basis points, as a result of sourcing benefits, with food gross margin expected to grow by 10 basis points to 30 basis points due to further operational efficiency.

M&S said it plans to open around 1% of new space in the UK in the current year, 2.5% of new space in food, and no net space growth in general merchandise. International space is expected to grow around 10%.

It said it is also lowering capital expenditure, expecting it to be around GBP500 million to GBP550 million each year for the coming three years, from on average around GBP800 million to GBP820 million each year over the last three years.

"Our priorities now are to deliver on the investment we have made and to make M&S a more profitable, stronger and well-equipped business, said Chairman Robert Swannell in a statement.

Internationally and online, M&S had a good year, with M& sales up almost 23%, supported by more general merchandise sales online, and international sales up 6.2%, supported by 55 new international store openings in the period. M&S said that 55% of M& sales were picked up in store during the year, using its click and collect service.

In February, M&S launched its long-awaited new website platform, a move it hopes will encourage sales growth in its general merchandise business and help it catch up with rivals who have been quicker at taking advantage of online sales.

"As previously indicated, our new M& site will take four to six months to settle in and, as a consequence, will have some impact on General Merchandise performance in the first quarter," the company said.

M&S said that the improving trend in clothing sales seen in the fourth quarter of its last financial year has continued into the first quarter, with its food business continuing to outperform the market.

"We have started the year with a full price stance, but during the year there will be promotional activity. We have a good promotional calendar set out for the year," Chief Executive Marc Bolland told journalists Tuesday.

"We still question the renewed relevance of the key clothing proposition, particularly in view of the acutely and ever-increasingly competitive nature of the multi-channel clothing market," analysts at Santander said in a research note earlier this month.

M&S shares were down 2.7% in early trading Tuesday, at 438.70 pence, the second-biggest decline on the FTSE 250.

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Source: Alliance News