M&S warns clothing turnaround plan will hit short-term profit

Full-year profits at Marks & Spencer fell 18.5% as new chief executive Steve Rowe engaged in what appeared to be some canny 'kitchen sinking', warning that the current year's profits will be hit by his plan to turnaround the clothing business.

Rowe pushed through a £200m charge on non-underlying items that dragged down profits for 53 weeks to 26 March, with underlying pre-tax profits rising 4.3% to £689.6m on sales up 2.4% to £10.6bn.

Pre-tax profit, however, fell to £488.8m from £483.3m and basic earnings per share declined 16.2% to 24.9p.

The company’s food business saw 0.2% growth in like-for-like sales, but LFL sales at the clothing and home division dropped 2.9%.

Chief executive Steve Rowe said: “Our results last year were mixed. We continued to outperform on Food but we underperformed on Clothing & Home sales. This is not satisfactory and today we are outlining our initial plans to address the issues and to position Marks & Spencer to deliver profitable sales growth.

“We are clear on the actions needed to recover and grow Clothing & Home, which is our top priority; to continue to grow our Food business; and to focus on driving profitability. We are investing to re-establish our price position by sharpening prices and to enhance service by putting more employees into our stores.”

As a result of the actions that will be taken to turnaround the clothing division, short-term profit is expected to take a hit, Rowe said.

Marks & Spencer said it plans to focus on product, quality and fit and restore its price position by cutting prices and reducing its promotional stance.

In addition, it plans to develop sharper ranges, have better availability and invest more in store staffing.

M&S said it will pay a total dividend of 18.7p per share, up 3.9% on the previous year, and a special dividend of 4.6p for the first half of 2016/17.

At 0925 BST, shares in the retailer were down 7.8% to 409.80p.

Analysts react

Steve Clayton, head of equity research at Hargreaves Lansdown, said: ““Challenging conditions features highly in the buzzword bingo this earnings season and M&S are no exception. The themes of strong growth in Food but poor performance in Clothing and Home have been an ever-present scratched record for some years now. New CEO Steve Rowe is determined to nudge performance onto the next track.

“A focus on customer service, pricing and fewer promotional sales are part of the new strategy set out today, which will include a review of their UK store estate, likely to result in a reduction in square footage. We won’t know whether this means store closures and won’t find out until the Autumn. In the short term profits will suffer and shareholders are being paid a special dividend to dull the pain.”

Clive Black, head of research at Shore Capital, downgraded his full-year 2017 pre-tax profit estimate following the update, to £625m from £746m.

“As we have commented before now too, whilst we have considered downgrading our recommendation on M&S until we see the fruits of Mr. Rowe’s labours, we do also back him as more likely to succeed than not, as such whilst a recommendation for the more patient minded, we retain our buy stance on M&S shares,” Black said.