M & S pounds 924m is not enough

Investment Column
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Sir Richard Greenbury, chairman of Marks & Spencer, was in typically prickly form yesterday. Why, he wanted to know, had the company's shares been marked down by 10.5p when it had just reported profits up 8.5 per cent to a thumping pounds 924m? These are the kind of figures other high-street retailers would surely die for, he said.

Yesterday, however, the market had a point. Good though the results were, they were around pounds 20m-pounds 30m worse than expected and there were a few nasties lurking within. The Brooks Brothers business remains a headache and yesterday saw a two-thirds slump in profits from pounds 14.8m to pounds 5.9m. M&S admits mistakes have been made. First it paid too much, then three years of modest profit growth have been followed by merchandising mistakes such as a failure to develop its casualwear range. The recent appointment of a new chief executive should help.

The slowdown in Hong Kong is also a disappointment. In the UK, a cynic could carp about the 2 per cent growth in the home furnishings profit, compared with last year's 14 per cent, but these are niggles. M&S is right not to chase sales with discounts.

On British high streets, M&S is battling against sluggish markets but has turned a disappointing final quarter and a flat January, February and March into good form in April and May. In clothing, sales in the last two months are running at about 6 per cent up, which represents a gain in market share. In foods, sales in the same months are up 9 per cent. Womenswear has been doing well but menswear is soft and prices may have to fall later in the year.

The M&S strategy is to add, modernise and extend stores in the UK while expanding the brand overseas, with Europe and the Far East the main targets The financial services business, which began selling pensions and life assurance this month, also offers further scope for expansion.

In Europe sales increased, with new stores in Paris and Barcelona and a store extension in Madrid. But profits dropped from pounds 28m to pounds 20.7m as margins narrowed. Europe is worth pounds 430m in sales to M&S but Sir Richard says it could be worth pounds 1bn.

Sites are being sought in Germany and China. Investors should not hold their breath, however - the company took 16 years to find a suitable site in Bordeaux.

M&S may not set the pulse racing but 30 per cent outperformance of the market over five years suggests it is doing the right things. NatWest Securities is forecasting profits of pounds 1.03bn next year and earnings of 24.6p. On a forward rating of 16.6, worth locking away.