M&S celebrates profit surge with store expansion plans

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Marks & Spencer unveiled its first major expansion plans yesterday since the late 1990s alongside a 32 per cent jump in interim profits that sent its shares up to a new record at just under £7.

The retailer, which is on track to scratch the symbolic £1bn profit barrier for the first time since 1998, intends to extend its space by up to 20 per cent over the next five years as it pushes hard into new product areas such as electrical goods and in-store restaurants.

It is anxious to catch up with the shift in shopping patterns that has seen local high streets suffer as more people visit stores outside towns and on retail parks where it is under-represented.

Stuart Rose, the chief executive who has driven the turnaround, also hinted that the group would decide over the next 12 months whether to return to the western European markets it left under the previous management regime. "We will stay UK- centric until next November but there's no reason why this business can't thrive overseas," he said. "We believe we have plenty more to do but the best is yet to come. As long as we control our enthusiasm we have a good opportunity to drive this business forward for the next decade."

His plans for the business delighted investors, who scrambled to buy M&S shares, which closed up 6 per cent at 698p after briefly breaking through £7. Most analysts upgraded their forecasts, with Numis Securities looking for £975m, up from £896m. Consensus for the full year rose to around £940m.

Even the prospect of a sharply higher capital expenditure bill failed to unnerve the City. M&S's store plans will cost it between £750m and £800m this year, up from previous guidance of £520m to £570m, and "at least" the same next year.

Mr Rose said M&S had "stood still" for seven years, during which time its global retail positioning had tumbled from number two behind Wal-Mart to number 32, adding that it did not have to be "condemned" to being an £8bn business forever.

M&S is expanding on all fronts: clothing, home, food as well as into new areas in an attempt to "stretch its brand". Mr Rose said the group could build its nascent electricals lines, which are on sale in 13 stores, into a £1bn business.

It wants a bigger presence in city centres and on high streets as well as new stores outside towns and on retail parks. It will have revamped 35 per cent of its existing space by this Christmas and double that by November 2007.

Some analysts were sceptical about the chances of M&S's plans succeeding. "A lot of what is supposed to be driving further growth has been tried before and failed, such as big expansion targets, more space in city centres and stretching the brand," said Philip Dorgan at Panmure Gordon.

Tony Shiret, at Credit Suisse, said: "I've been brought up on a diet of retailers falling over when they start expanding. It is quite an aggressive move. It's not absolutely guaranteed to fall on its face but there is a lack of reality about the market's reaction."

Mr Rose said that only "superstition" prevented him from declaring the group's recovery until after the key Christmas trading period despite reporting the group's strongest set of figures in eight years. Dismissing the unseasonably warm autumn as being "for wimps", Mr Rose said the group's crucial third quarter had started well, with like-for-like sales of general merchandise matching the 9.2 per cent delivered in the first half. Food grew at 5.3 per cent on an underlying basis during the first six months. All parts of the group increased their market share, with its main womenswear business growing to 10.5 per cent .Its childrenswear improved to 4.4 per cent, signalling that it had recovered from its recent difficulties.

Pre-tax profits in the six months to 30 September rose by almost one-third to £405.1m on sales up 11 per cent at £3.9bn. A strong performance from its mainly franchised overseas arm, which lifted profits by a similar amount to £40m, helped, as did the contribution from its personal finance joint venture with HSBC.

Only a 9 per cent jump in costs, which was higher than guided, held back the group's UK profits. It spent more on staffing its stores and marketing its products, including adding Lizzie Jagger, Mick Jagger's daughter, to its stable of models that also includes Twiggy.

It expects to repeat its 100 basis point increase in its interim gross margin in the next six months, helped by sourcing more product from cheaper markets and putting less stock into its end-of-season sales. It lifted its interim dividend by 31.3 per cent to 6.3p.

The group also said it had appointed John Dixon, formerly Mr Rose's right-hand man, to head its internet division. He has been charged with growing the £100m-a-year business into one taking £250m within two years.