Marks & Spencer's new boss Marc Bolland said he was braced for tougher times today despite delivering better-than-expected sales in his inaugural update.
The former head of Morrisons, who joined M&S on May 1, reported same-store sales up 3.6% in its first quarter - a result that would have been around 0.9% higher with the timing of Easter stripped out, according to M&S.
The result beat market forecasts for a rise of 2.3% and marked the chain's third quarter of sales growth in a row as its recovery gains momentum.
Strong demand for barbecue foods and summer knitwear helped it notch up like-for-like sales growth of 1.5% for food and 6% for general merchandise in the 13 weeks to July 3, or up 2.9% and 6.4% respectively on an underlying basis.
However, the group's shares fell more than 3% in a wider stock market sell-off as the group said Government austerity measures and the incoming VAT rise to 20% posed a threat to consumer spending.
"We have made a good start to the financial year, but following the recent Budget and the actions proposed to reduce the national deficit, including the increase in VAT, we are cautious about the outlook for consumer confidence and spending," it said.
The group still believes the wider economy will avoid a double-dip recession, although it is braced for pain on the high street from spending cuts and tax hikes.
Mr Bolland added: "It's too early to see the effects (of the Budget) at the moment, but we will certainly see the effects coming through in the next three quarters."
Despite the disappointing market reaction to today's figures, analysts gave the group the thumbs up.
Philip Dorgan at Ambrian said it was "another pleasing sales update, demonstrating an improving two year trend".
"M&S is not without its problems, but we believe that they have solutions," he added, citing the group's potential to trade more aggressively online.
Jean Roche at Panmure Gordon said M&S was also likely to "hold up relatively well" amid Government spending cuts and tax hikes thanks to its more upmarket target customer base.
M&S said it had gained market share in clothes thanks to improved ranges, while it added 570 new products in its food aisles.
Its internet offering M&S Direct saw sales leap 49% higher, although the international division posted a more muted 0.9% lift in sales as trading was hit by economic woes in Ireland and Greece.
Retail experts are now waiting to hear details of Mr Bolland's plans for the group at the interim results in November.
He is currently on an induction period as part of a handover with outgoing boss Sir Stuart Rose, having spent his time so far visiting stores, suppliers and international operations.
Mr Bolland is also preparing for his first annual general meeting with M&S next week, when pay is likely to be high on the agenda once more, with packages for Mr Bolland and Sir Stuart under scrutiny.
The group is also recruiting a new finance director to replace Ian Dyson, who dealt an early blow to Mr Bolland by announcing his departure to head up pub group Punch Taverns less than 48 hours after the new chief executive took up his post.
M&S confirmed it had made "positive progress" on finding his replacement.
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