Marks & Spencer holds dividend as profits plunge 64pc

Although sales remained steady, Marks & Spencer reported a 64% plunge in profits for the year to 1 April after taking a £437.4m hit mainly from changes to its pension scheme, international stores, and UK head office.

As well as maintaining the full year dividend at 18.7p thanks to continued strong cash generation, there were other causes for shareholder optimism as the general merchandise arm's market share started to stabilise and the food business continued to grow like topsy, while pre-exceptional profits were better than the market expected.

Group revenues increased by a very modest 0.6% to £10.62bn as food like-for-like sales fell 2.1% in the final three months of the year and GM sales by 5.9%, partly due to Easter falling outside the financial year.

This saw UK LFL store sales in the fourth quarter fall by a worse than expected 3.6%, which when combined with quarterly international LFL sales down 1.8% and online sales up 7.6%, to drag total UK LFL sales to a 1.9% decline for the full year.

With there being no Easter in the 2016/17 financial year, management estimated this had a negative effect of roughly 0.3% on GM sales and circa 0.5% on food sales.

While GM revenue was down 2.8% for the full year this was due to planned reduction in promotions and clearance sales, which saw gross margins improve 105 basis points with full price sales growth of 2.7%.

Food revenue growth of 4.2% for the year was driven by new stores.

Group profit before the significant one-off charges and tax was down 10.3% to £613.8m, while the trading profits of £691m were better than many analysts forecast.

"As we anticipated, the planned restructuring of M&S has come with a cost and has impacted profits, but the business is still strongly cash generative and we reduced our net debt," said chief executive Steve Rowe.

He said improvements to GM products and proposition, "our customers have noticed; we are starting to stabilise market share and importantly have seen full price market share growth, as we removed excessive discounting".

"Looking ahead, we will continue our programme of self-help in a tough trading environment. We remain committed to delivering for our customers and shareholders as we build sustainable foundations for the future."

Guidance for the new financial year included the addition of roughly 90 new Simply Food stores, though gross margins will be slightly dented by cost inflation, while capital expenditure is expected to be around £400m.

Total UK stores costs will grow 2.5-3.5% as a result of the new space, cost inflation and the annualisation of investment in customer service, which will all be weighted towards the first half.

Reaction and analysis

Shares in M&S fell 1% to 384.2p in early trading on Wednesday.

The performance of the GM business was a "sobering moment for M&S shareholders, calendar effects aside, showing the difficulties in this core category" said analysts at Shore Capital, though the trading profit was well ahead of its estimate.

John Ibbotson, director of the retail consultancy Retail Vision, said the results "are nothing less than awful".

“For years the brand’s successful food range provided a fig leaf that spared the blushes of its underperforming clothes ranges. No longer – stalling food sales and profit over the past year have revealed the full, naked weakness of the brand’s unappealing clothing lines," he said.

“With inflation eating into the profits of the once reliable food offering, and a string of one-off expenses slicing into profits elsewhere, the net result has been to send pre-tax profits tanking by nearly two-thirds."

He believes M&S has too many high street stores in the wrong locations and too much competition in both fashion and food, online and instore, though feels the appointment of former Asda chief executive Archie Norman as chairman is to be welcomed.

"Drastic action is needed to turn around M&S and Norman will not be afraid to take it.”

Laith Khalaf at Hargreaves Lansdown said while new boss Rowe is pulling out all the stops to turn performance around, "M&S is facing some big economic headwinds, in particular the fall in sterling, which is pushing up the price of food and clothes against a backdrop of squeezed consumer incomes. The high street is also in decline as more of us turn to our mobiles and tablets to do our shopping, which leaves M&S fighting an even steeper uphill battle."

"All of this paints a pretty gloomy picture for the high street retailers for the foreseeable future. The new strategy at Marks and Spencer is much needed, and may eventually pay off, but it’s not going to be an easy ride."