Sales up 6.8% at M&S, yet still Rose won't call the turnaround

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Marks & Spencer delighted the City yesterday with its strongest trading figures for years but Stuart Rose, its chief executive, still stopped short of declaring the group had turned the corner. Shares in the retailer shot 22p higher to 586p, reaching levels not seen since 1998 when the group was at the height of its hubris and ruled the high street with profits of more than £1bn.

In investors' minds, at least, Mr Rose has delivered the recovery he promised when batting off Philip Green's 400p-per-share advances two summers ago.

Yet Mr Rose is anxious not to count his chickens, even if they are the succulent oven-ready Oakham birds that feature in the group's widely mimicked food porn adverts on TV.

He is particularly keen not to hold himself hostage to fortune in the manner of Luc Vandevelde, the former chairman who declared M&S was "well beyond" the recovery stage in November 2003 only to be ousted five months later in the early phases of the takeover débaâcle.

Despite like-for-like sales growth of 6.8 per cent in the 13 weeks to 1 April - twice as fast as analysts had expected - Mr Rose ducked out of using the "R word", insisting: "We've been careful to say there is no recovery yet. We are just making steady progress."

He promised to revisit the question only if the group managed to grow its sales this Christmas when it will be up against much tougher comparisons.

Mr Rose did concede that the sort of progress M&S is making, which includes grabbing market share from rivals in all of its categories, puts the retailer six months ahead of his own game plan, drawn up during the frenzy of Mr Green's advances. "I do hope our shareholders feel we have vindicated ourselves when we said what value there was in the business when we turned the offer down in 2004," he said.

But with yesterday's trading update showing the third consecutive quarter of growth - and that in a year when Mr Rose said he'd be pleased with just one week of positive sales - is the man parachuted in to save the British icon of retailing from falling into Mr Green's clutches being too modest?

Some analysts certainly think so. Richard Ratner, at Seymour Pierce, who was no fan of Mr Rose's at the outset, said: "He is being overcautious because he's done extremely well. These are very, very good like-for-like figures at a time when everyone else is struggling to stay above the line and most people are below it."

M&S said its like-for-like general merchandise sales, which includes clothing, home and footwear, rose 8.2 per cent in its fourth quarter, while food sales climbed 6.8 per cent on the same basis. And this against a tough retail backdrop and up to eight inches of snow on the ground.

M&S's numbers contrasted particularly sharply with those recently reported by Next, which unveiled its worst sales figures for more than three years, with an underlying fall in sales of about 9 per cent.

Building on a crescendo of profit upgrades, analysts again increased their forecasts yesterday both for the year just ended and the coming one. The only reason current estimates did not soar above the £745m to £755m range signalled yesterday by M&S was because the numbers included £26m of accelerated asset writedowns because it is modernising its store portfolio and a total staff bonus of £70m, which was £10m more than expected.

The upgrades for next year, however, put M&S within a two-year whisker of achieving profits of £1bn once more, according to Deutsche Bank, its house broker, among others.

Kiki MacDonald, the investment director at Standard Life, one of the group's top shareholders, said: "The recovery is firmly on track although we believe there is still further potential at M&S. Stuart and his team are clearly doing a good job for shareholders and employees alike."

Yet Mr Rose's caution was echoed elsewhere. Philip Dorgan, at Panmure Gordon, said: "After this excellent Q4, it would seem churlish to challenge that this will happen, but we believe that the real hard work starts now, although the force is clearly with them given the easy comparables in Q1 and Q2."

Francesca Zedda, the executive fashion editor at Easy Living, a Conde Nast women's title aimed at M&S's archetypal female fan, has a foot in both camps when it comes to calling the recovery. "Definitely this season M&S is better than it's ever been. It has very daring, directional pieces that you can actually find in store," she said.

Dresses that softly hint of 1980s puffballs with rolled-over hems and City shorts in this season's navy and white colour chart have made it on to the shop floor.

"They have upped their credibility. They have turned it around very well but they have to keep it up. I'm not completely sold. I have to see the autumn/winter collection first," Ms Zedda added.

In an attempt to cement that recovery, M&S will embark on the biggest store refurbishment programme undertaken by any UK retailer in the past 10 years. By Christmas, one in three of M&S's 400-odd stores will have been given a makeover to make them "brighter, lighter and more contemporary" in the words of Mr Rose. To pay for this M&S is spending up to £570m, about £40m more than it had originally budgeted.

To date, the group's turnaround has been predicated on better stock control, screwing more money from its suppliers and selling more clothes at full price, actions that have all strengthened its profit margin and saved it money. A cool £260m in the past 12 months alone, in fact. It has worked hard on slashing its prices, reducing the cost of basic ladies shirts and jumpers to £12 a throw. This has all helped it to sell 11.6 per cent more items at full price in the past three months, compared with 5.3 per cent more in the previous quarter.

But with the cost of doing business soaring, by an estimated 6 to 7 per cent at the operating level during the next year, the time has come for the retailer to change tack slightly. Predicting the rate of deflation on the high street would "slow down", Mr Rose said it was time to change the game from growing its margin to driving the top line. More than 18 million additional customers shopped in Marks last year and the new-look stores are intended to build on that progress in the coming 12 months.

Once Mr Rose has rebuilt M&S - or in his words "put in place a proper recovery programme that is built with proper bricks and proper mortar" - he can afford to dream a little about what else the UK retailing doyenne has to offer. On the agenda for next year is whether to take the first overseas steps with wholly owned stores since M&S beat a retreat from France and Belgium under Mr Vandevelde's aegis in 2001. "I wouldn't rule it out," he said.

Only then will Mr Rose have a legacy truly worthy of handing over to his eventual successor, providing, of course, Christmas trading doesn't cause him to choke over that "R" word.

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