Business Analysis: Stuart Rose may at last be delivering at M&S

Before this morning's second-quarter trading update, swathes of once-hostile analysts have turned positive on the group. There are even whispers that the right tailwind from its top line could trigger earnings upgrades. And all that in a retail sector where good news is like gold dust.

Shares in M&S rebounded a further 2 per cent to 384p yesterday, hitting highs not seen since May 2002. The fact that five directors - the chief executive, Stuart Rose, included - have spent £1.1m on buying shares in the group in the past month at between 344p and 357p has certainly helped. Philip Dorgan, at Panmure Gordon, says of Mr Rose: "By buying shares and with his body language, most people are expecting to see some positive comment about the start of Q3.'

Will the man parachuted in to stop M&S falling into Mr Green's clutches finally declare that the nation's former barometer of style has finally turned the corner?

It appears that if the City could will him to, it would, but the bottom line is that at 7am M&S will unveil its eighth straight quarter of falling underlying sales. Mr Rose will remind investors, lest they forget, that the group is battling against the toughest clothing market in years.

Rather than blindly chase sales growth at any cost, he will flag that the company is sticking to its new mantra of keeping stocks tight and improving higher-margin, full-price sales. This is expected to boost gross margins, saving the group £100m this year and putting it on course to cut £260m from its cost base.

All this was made possible by the group's suppliers, who are bearing the brunt of Mr Rose's tighter regime. Without the flexibility afforded by the new supplier terms, M&S would not have been able to redress its out-of-sync pricing in an increasingly value-conscious market. The retailer has concentrated its firepower on its cheapest products, dubbed "opening price points", selling serviceable "with cashmere" polo necks in colours that for once are "on trend" for a mere £25. Basic round-necks can be had for £12 and Marc Jacobs-esque ballet pumps are just £29.50 a pair.

Tony Shiret, at Credit Suisse First Boston, who has a 400p price target on M&S stock, says: "There has been a dramatic readjustment on pricing. They wouldn't have financed that without some pretty serious contributions from suppliers." He adds: "The hype has got a bit overblown on product. We think there are about four or five must-have or semi must-have pieces in the whole shop. But the main thing is they are being well controlled and have got most of their business in areas with the lowest mark-down risk."

The group's flagship Marble Arch store celebrated its 75th birthday at the start of this month. The lick of paint the store has had in honour of the occasion may be a far cry from the sleek backdrop to the company's new store in Victoria - its first new store in London for a decade - but it is a start.

The Marble Arch store on Saturday looked less WI jumble sale, more viable shopping destination, although it has yet fully to kick its old habit of regarding clothing as a commodity. Those customers who bothered to visit the first floor were still greeted with rack upon rack of the same two-a-penny trousers and skirts that shoppers have been shunning for seasons. And in those areas that M&S has got right, it was still impossible to find much below a size 14. The same old 22s, 20s and 18s still languished at the back of the racks, despite the group's recent introduction of a separate "Plus" sized range.

That said, the group has won favour from fashion pundits for its recognition that beige drawstring trousers just don't cut it for most of its target customers in the way they once might have.

Susie Forbes, the editor of Easy Living, a lifestyle magazine aimed at women aged 30 upwards, said: "There are lots and lots of really strong pieces that as an M&S shopper myself I'll be running in to buy. It is now back on my retail radar and I make sure that I pop in to see what's new."

Richard Hyman, the head of the Verdict retail consultancy, views this morning's trading update in terms of a "performance floor". He says: "They have clearly turned the corner but there is a big difference between that and a recovery. The acid test is how well spring/summer next year will perform."

What Mr Shiret thinks must come next is a stronger focus on the middle and upper parts of the market, which he says must go hand-in-hand with an ability to "build up more in-house supply expertise and less reliance on third parties". Mr Dorgan adds: "While all this is good, M&S has a long way to go in a soggy clothing market, especially given that January sales will start in November."

Mr Rose is on the record as stating that he feels he will have succeeded if he delivers even "a centile of growth" before the current financial year is out. Given the expectation built into M&S's share price, he must hope that investors share his sentiment in the event that he succeeds.

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