Profits pass £1bn but slowdown fears weigh on Marks & Spencer

Marks and Spencer smashed back through the £1 bn pre-tax profits barrier yesterday, but its shares tumbled as the City forecast a slowdown in profit growth and its chief executive, Sir Stuart Rose, warned of tough times ahead.

The retailer raised its adjusted pre-tax profits by 4.3 per cent to just over £1bn, which was ahead of analyst forecasts and was the first time in a decade and only the second time in its history that it has passed the milestone.

But Sir Stuart will not collect a bonus and staff had their total bonus pool slashed from £91m to £17m, as the high street favourite actually missed its internal profit and sales targets. For the 52 weeks to 29 March, total M&S sales grew by 5.1 per cent, with its British business growing by 4.2 per cent and international sales by 16.8 per cent.

However, its UK like-for-likes sales fell by 0.5 per cent, with a 0.5 per cent drop in general merchandise and 0.4 per cent in food. Sir Stuart said: "The first half of the year was pretty good and the second half of the year was less good."

Shares in M&S closed down by 5 per cent to £3.96 although most retail stocks fell yesterday.

Sir Stuart said the "economic climate is uncertain" and that this would affect its performance for the next two financial years. "Customers are worried about their financial health and they are worried about the impact it is having on their ability to spend on particular things such as clothing and home products."

But Sir Stuart vowed that while M&S is "throttling back" on capital expenditure in the short term, on initiatives such as its store refurbishment programme, it would continue to invest in its product, in store estate, IT and logistics. Previously, M&S said it would have refurbished 90 per cent of its UK store estate by Christmas 2008, but this has now been revised back to 80 per cent for the current financial year.

The retail giant is to trim £50m of operating costs in the current financial year.

M&S is also to tweak its pricing architecture, which will mean it will scale back the volume of value products it sales from 30 per cent of its total product offer to 28 per cent. It will also increase the number of products sold in higher-price brackets, such as its Autograph range.

Sir Stuart vowed to double sales of Autograph products, including flowers, homewares and clothes to £600m over the next three years. In food, Sir Stuart rejected criticism that it was too expensive and said it would add a further 70 Simply Food stores this financial year.

He also revealed more details about a trial of 350 "must have" branded products, a first for M&S, in about 20 stores in the North-east from the end of July. These products will include Marmite, Coca-Cola and Weetabix.

However, City analysts said that while M&S's pre-tax profits and fourth quarter trading figures were ahead of forecast, they expected profit growth to fall back substantially over the next two years.

Pali International analyst Nick Bubb said: "With like-for-like remaining negative, we think there will be a lot of pressure on the bottom line this year. We still look for negative 4 per cent LFL in non-food and negative 2 per cent in food in 08/09." He added that he expects its consensus estimate of M&S pre-tax profits of £925m to come down towards its £875m to £900m forecasts for the current financial year.

On its burgeoning international business, Sir Stuart said M&S would open again in France if the right opportunity arose, but said Germany was not an option.