Marks & Sparks's mixed fourth quarter still beats forecasts

Fourth quarter sales at Marks & Spencer were up 1.9% as the food business outperformed the market but was again held back by weak clothing sales.

Food sales were up 4.0% in total but disappointingly flat on a like-for-like (LFL) basis, short of a consensus forecast of 0.5%.

Clothing and home sales, known as general merchandise (GM), were down 1.9% in total and 2.7% on a LFL basis. The consensus for LFL sales was a 3.5% decline.

New chief executive Steve Rowe said: "Although the sales decline in Clothing and Home was lower than last quarter, our performance remains unsatisfactory and there is still more we need to do."

On the upside in GM, gross margin expectations have risen to between +240-250 basis points after a continued improvement in buying margin and some investment in price.

Rowe, who was recently promoted after a short stint heading up the clothing division following a long stint in charge of food, added that turning around the GM business "by improving our customer offer is our number one priority", but investors will have to wait until May to get details of his strategy to revitalise the brand.

Encouragement also came from M&S.com, where sales were up 8.2% alongside a strong improvement in customer satisfaction scores.

Despite the improvement in group sales, which were up on a flat third quarter and the 1.4% increase in the first half, there was no comment on profit, apart from at the international division.

While international sales were up 3.8% in constant currency terms and 4.3% on a reported basis, the company reiterated that continued currency pressure and general challenging trading conditions were still expected to "heavily impact" full year profitability of the international division.

Analyst opinion

Analysts generally anticipated consensus full year PBT to remain just above £670m, with EPS of just above 34p.

Canaccord welcomed Rowe's arrival in the hot seat, given the breadth and depth of his operational and managerial experience around the group over the past quarter of a century.

"We note that for the foreseeable future he intends to in effect retain the role of Head of GM, the position he was last in before his elevation, albeit for a relatively short time given the lead times within the clothing industry. With his stated aims of customer focus and simplifying the business, we see this as a positive and a statement of intent regarding unfinished business."

Shore Capital added: "Whilst the market will understandably concentrate upon the GM performance it is important to retain a sense of perspective to the extent that M&S, aided by new space, is demonstrably and sustainably out-performing the UK grocery market."

After the analyst conference call, ShoreCap said management had spoken of new food outlets performing ahead of plan with attractive internal rates of return being generated.

They added that M&S contained "considerable positive operational gearing" potential from the group’s business model with sustained LFL sales growth. "Whilst the mid-teen percentage margins of halcyon days are not within our purview, same-store advances can still materially move margins to our minds, so driving considerable free cash generation in due course, noting that Mr. Rowe may wish to tailor the group’s store estate to a configuration of this liking too."

Cantor Fitzgerald's Freddie George was much less positive, saying he believes history will show Rowe "has inherited a business that has pulled out the ‘kitchen sink’ to improve its profits over the last three years", with GM gross margins likely to consolidate after two years of growth and "no easy remedies to drive sales".

"Food has been a surprising success but we believe faces growing competition from a more confident food retail sector. In the meantime, we cannot see the company moving off the current level of pre-tax profitability, which has averaged £669m over the last seven years."