Hope for women's clothing as M&S profits rise - UK
Fin24 - Nov 6th 2014, 11:00
London - A glimmer of improvement in women's clothing helped British retailer Marks & Spencer to post its first rise in first-half profit for four years, though analysts said it is too soon to declare a turnaround after years of false dawns.
Shares in the high street stalwart, down 17% over the past year, jumped by nearly 10% after results showed profit margin gains, with cost cuts and rising sales of upmarket food offsetting a deepening decline in sales of general merchandise, spanning clothing, footwear and homeware.
The key womenswear category, however, achieved a 1.3% sales uplift in the first five months of the half-year to September 27. At stores open more than a year, womenswear sales were up 0.7% over the five months.
Chief executive Marc Bolland said the company's revamped womenswear had won praise in the fashion press and that sales showed that female shoppers were being drawn back to its stores.
A poor September dented the first half performance, as unseasonably warm weather kept high-margin winter items such as coats, knitwear, and boots on shop shelves.
Analysts noted the green shoots but said it is too soon to say that Bolland is finally delivering a turnaround, though the CEO raised the profit margin forecast for non-food products, lowered guidance on cost growth, and upped the dividend.
"These results are probably the first for a long time that will not result in forecast downgrades," BESI Research analyst Tony Shiret said.
Others, meanwhile, said that the retailer's weaknesses had not gone away.
"Beyond the flagship stores, many still feel like museums where older people go to browse black slacks," said Phil Dorrell, director of retail consultancy Retail Remedy. "But Marc Bolland may have done just enough to avoid the rocks - for now."
Bolland has sought to improve the quality of M&S womenswear by working closely with suppliers, reducing the number of sub-brands, and cutting promotions, but non-food sales from stores open more than a year still fell for the 13th quarter in a row.
He told reporters that consumer research showed that customers now believe M&S is "back in style" with fashionable clothing. "We wouldn't have had that four years ago," he said.
Sasha Wilkins, founder of the LibertyLondonGirl.com fashion blog and former executive style editor at the Wall Street Journal, said that M&S style director Belinda Earl had created a much clearer brand identity.
"They have just looked at every single area of the brand and made it more relevant to the British consumer," she said.
Bolland, poached from grocer Morrisons in 2010, has spent more than £2.3bn to address decades of underinvestment, revamping products, stores, a website, logistics, and marketing.
M&S general merchandise sales at stores open more than a year fell 4% in the 13 weeks to September 27, its financial second quarter. That compared with a consensus analysts' forecast of a 3.7% decline and a first-quarter drop of 1.5%.
M&S said the mild September weather knocked about 2.5% off non-food sales in the second quarter.
Rival Next also cited the weather when it cut its profit forecast last week and fashion firm SuperGroup issued a profit warning. Growth at Primark slowed, but the discount chain said on Tuesday that it was unconcerned by the weather.
Many British retailers also face the challenge of cost-conscious shoppers' changing their habits, turning away from traditional stores towards the internet and discount chains.
However, M&S's gross profit margin in general merchandise rose by a better than expected 150 basis points in the first half, benefiting from lower prices from suppliers and fewer in-store discounts. The company also said it was reining in costs.
As a result, first-half pretax profit before one-off items was £268m, ahead of analysts' average forecast of £252m, and up from £262m last year.
M&S also raised its guidance for non-food gross margin for the full 2014 to 2015 year to growth of 150 to 200 basis points, from 100 basis point previously, and lowered its guidance on operating cost to 3.5% growth from 4%.
The group ended the first half with free cash of £71m and raised its interim dividend by 3% to 6.4 pence. It said it would update on further potential shareholder returns when it publishes full-year results in May.
The trends support the prospects for higher cash flow and shareholder returns, one major M&S investor told Reuters. "There's the first glimmer of that being possible in these results. But M&S is still flagging a very tough environment and I don't think anyone's expecting sales to roar away," he said.
M&S's food business, which contributes more than half of group sales, is performing better than clothing, with its focus on quality and innovation setting it apart from the wider grocery industry. Its like-for-like sales rose 0.2% in the second quarter - a 20th consecutive quarterly increase.
M&S forecast online sales would return to growth by Christmas after falling 4.6% in the second quarter.
Shares in the company were up 9.7% at at 434.7 pence by the close, valuing the business at £7.2bn.From Fin24.com
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