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.