M&S profits rise as cost savings offset clothing sales fall

By James Davey

LONDON (Reuters) - British retailer Marks & Spencer posted a rise in first-half profit for the first time in four years, as cost cutting and rising food sales offset a deepening slide in clothing revenues, hit recently by warm weather.

Shares in Britain's biggest clothing retailer, down 17 percent over the last year, jumped more than 8 percent in early Wednesday trading as the group raised its profit margin forecast for non-food products.

However, analysts said the jury was still out on whether chief executive Marc Bolland was delivering a long-anticipated turnaround, with clothing sales from stores open more than a year falling for the 13th quarter in a row.

"Beyond the flagship stores, many still feel like museums where older people go to browse black slacks," said Phil Dorrell, director of the retail consultancy Retail Remedy.

"But Marc Bolland may have done just enough to avoid the rocks – for now."

Bolland, poached from grocer Morrisons with great fanfare in 2010, has spent over 2.3 billion pounds to address decades of under-investment, overseeing the revamp of products, stores, a website, logistics and marketing.

He says the group is improving "step by step." But his new clothing team has so far failed to deliver a sustained increase in sales and, for the first time, Marks & Spencer (M&S) earned less in the year ended March than rival Next.

Sales of general merchandise products, spanning clothing, footwear and homewares, at stores open over a year fell 4.0 percent in the 13 weeks to Sept. 27, its fiscal second quarter.

That compared with analysts' average forecast of down 3.7 percent and a first quarter drop of 1.5 percent.

M&S said "unseasonal conditions" in September knocked about 1.3 percent off its first-half non-food sales.

Last week the warm weather forced Next to cut its profit forecast, while fashion firm SuperGroup issued a profit warning. On Tuesday discount chain Primark said it was unconcerned by the weather, though even its sales growth has slowed.

IMPROVING MARGINS

However, M&S said its gross profit margin in general merchandise rose 150 basis points in the first half, benefiting from better prices from suppliers and fewer discounts in the shops. The company also said it was reining in costs.

As a result, first-half pretax profit before one-off items was 268 million pounds, ahead of analysts' average forecast of 252 million pounds and up from 262 million pounds last year.

M&S also raised its guidance for non-food gross margin for the full 2014-15 year to growth of 150-200 basis points from growth of 100 basis point previously, and cut its operating cost guidance to a rise of 3.5 percent from 4 percent previously.

Get The App

Join the millions of people who stay on top of global financial markets with Investing.com.

Download Now

"The bull case for M&S has always rested on gross margin growth potential in clothing and the scope for cash returns, so M&S has delivered what they want today," said independent retail analyst Nick Bubb.

M&S raised its interim dividend by 0.2 pence to 6.4 pence a share and said it would update on further potential shareholder returns when it publishes full-year results in May.

M&S's food business, which contributes over half of group sales, is performing better than clothing.

Its like-for-like sales rose 0.2 percent in the second quarter -- in line with analysts' average forecast. Food gross margin was up 25 basis points over the first half.

The company said it now planned to open 200 of its "Simply Food" stores over three years, up from 150 previously.

"We are pleased with the progress we have made against our key priorities for the year: general merchandise gross margin, improving womenswear, driving food growth and cash generation," Bolland said.

M&S's online sales fell 4.6 percent in the second quarter having plunged 8.1 percent in the first quarter due to teething problems switching to a new website.