Costs warning takes gleam off festive sales figures at M&S

Marks & Spencer justified the City's growing confidence in the retailer by declaring a 2.9 per cent rise in underlying sales during its third quarter, but warnings of higher costs yesterday weighed on its shares.

Stuart Rose, the chief executive, refused to call the "turn" in the group's fortunes, saying it would take "growth on growth" in the summer before he used the "r" (recovery) word. "There has been a step change in the perception of M&S," he added.

He admitted the group had been "surprised" by demand for a range of products, leaving it short of some of the season's top gifts such as ladies' cashmere. Asked how he felt compared with Christmas 2004, when he declared himself "under the kosh" after a profits warning, he said: "Less koshed but not complacent."

In what was the retailer's best Christmas for two years and its second consecutive quarter of underlying growth, all of its divisions grew sales on a like-for-like metric. The biggest boost came from food, which saw underlying sales soar 5.1 per cent during the three months to 31 December. General merchandise, which includes women's clothing and homeware, managed like-for-like growth of 0.8 per cent, although this was without any benefit from promotions as the group stood firm on its decision not to indulge in any pre-Christmas discounting.

"Two swallows does not a summer make. I certainly would not call this a turn but it's a continued improvement as we go into a recovery," he added. He believes the group is in the "top quartile" of retailers.

Despite further profits upgrades - by about 3 per cent to £740m to March 2006 - some analysts believe the group is due a period of consolidation, which weighed on its shares. The group's decision to take a lesson from Tesco in managing expectations by flagging "increasing cost pressures" also contributed to a 2 per cent fall in its share price to 492.5p.

Marks & Spencer also announced the appointment of a new non-executive director, David Michels, the former chief executive of Hilton Group.