City bets against M&S over fears sales lift was driven by discounts
Friday 11 April 2014
The City marked Marks & Spencer's shares down sharply yesterday after it emerged that the retailer's recent recovery in clothing sales has come at the cost of heavy discounts, hitting the division's profitability.
Shares in the high-street stalwart initially rose more than 3 per cent in early trade as the City welcomed the news it had finally managed to halt sales declines in its struggling clothing division. But after a City analyst call with management and detailed questions about the retailer's profit margins, its shares ended down 3 per cent at 442p.
M&S chief executive Marc Bolland – who has been under pressure to turn around clothing sales – defended his "step-by-step" strategy and said shareholders and the board were backing him. The group split out its clothing from the whole of its general merchandise for the first time yesterday to report a 0.6 per cent rise in like-for-like sales for its fourth quarter to the end of March.
Overall general merchandise sales – which also include homewares – were still down 0.6 per cent, falling for the 11th consecutive quarter, although food sales were up by 0.1 per cent. Total sales ticked up 1.9 per cent.
"Our food business had another great quarter, especially considering the later timing of Easter," Mr Bolland said. "We continued to outperform the market with record sales around key events including Valentine's Day and Mother's Day."
But concerns remained that M&S has been heavily discounting in clothing to compete with the ever more competitive high street and online retail market, weighing on its profitablity.
Mr Bolland said M&S "didn't buy sales with promotions" but admitted it had to increase its discounting to keep up with rivals. This meant its group margins will be hit and the retailer warned UK gross margin for the full year will be down by about 20 basis points.
Analysts reckoned this meant profit margins in the non-food business were down 2 per cent. Andrew Wade, an analyst at Numis, said: "Given that food gross margin was better than expected, we must assume that the miss [versus company expectations set in January] in general merchandise was nearer 200 basis points below expectations. We remain unconvinced by the improvement in the general merchandise division."
Clive Black, a retail analyst at Shore Capital, added: "M&S have been clearing stock out aggressively. The key issue is will this weaker margin continue into next year – past the April year end. This is the question and will weigh on the share price."
Mr Bolland, who recently unveiled the second Leading Ladies advertising campaign for its womenswear which feature stars Annie Lennox, Emma Thompson and campaigner Baroness Lawrence, added: "We have improved and increased the style and trend credentials and the higher-quality products are selling well."
A newly relaunched website has prompted an increase in traffic, M&S said, and it will step up marketing of its website next month.
Caroline Gulliver, a retail analyst at Jefferies, said: "In essence we believe customers want to buy a better quality product from M&S and that improved technology and greater online clearance will help reduce markdowns and improve gross margins in the medium term."
The company will reveal its full-year results – expected to produce pre-tax profit of between £615m and £620m – in May.
- 1 Tourist films plane's descent just metres above packed Caribbean beach
- 2 Kate Moss: Previously unpublished nude photo revealed by Mert and Marcus
- 3 Indian woman creates 'Marriage CV' after parents put her on dating site: 'Definitely not marriage material. Won’t grow long hair, ever'
- 4 World Book Day: Boy 'excluded' from school after dressing up as Fifty Shades' Christian Grey
- 5 Bad Jews poster 'censored' on London Tube
Tourist films plane's descent just metres above packed Caribbean beach
Indian woman creates 'Marriage CV' after parents put her on dating site: 'Definitely not marriage material. Won’t grow long hair, ever'
Becky Watts: Four appear in court charged with hiding body parts after teenager's death
Isis 'bulldozes' Nimrud: UNESCO condemns destruction of ancient Assyrian site as a 'war crime'
Professor Brian Cox brands astrology-believing Tory MP David Tredinnick an 'outlier on the spectrum of reason'
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Durham Free School: 'Creationism taught at' free school facing closure
End of the licence fee: BBC to back radical overhaul of how it is funded
Elif Shafak: Turkish author warns against rise of British nationalism
Most people think legal tax avoidance is just as wrong as illegal tax evasion, poll suggests
Nigel Farage promises Ukip will not 'stigmatise' would-be migrants – and says he wants 'everyone to speak the same language'
iJobs Money & Business
£13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...
£8 per hour: Recruitment Genius: This Pension Specialist was established early...