Half-year results from Marks & Spencer show its core Food division is benefitting from its turnaround plan, although it was another dismal period for its Clothing & Home unit which led to the group reporting a heavy drop in profits.
Over the 26 weeks to 26 September, total sales in its food division rose 1.2% to £2.85bn with like-for-like growth of 0.9%. However, performance improved in the second quarter with like-for-like sales increasing 1.4% and volumes up 3.3% as M&S cut prices and improved its product ranges to tempt shoppers back to the chain. Gross margin only fell 20bps to 31% as investment in 400 price reductions in excess of 10% and cost inflation was largely offset by fewer promotions and cost reductions.
Meanwhile, the group’s ailing Clothing & Home arm saw total sales plummet 7.8% to £1.57bn, partly due to its programme of closing older and underperforming stores. However, like-for-likes were down 5.5%, with M&S blaming “availability challenges” and a “flat market”. The unit’s gross margin slid 105bps to 57.1% due to increased sourcing costs and discounting.
Overall, the group’s underlying pre-tax profit fell 17.1% to £176.5m on sales down 2.1% to £4.86bn.
Chief Executive Steve Rowe admitted its turnaround plan was behind schedule but stressed that the group was making progress, with its food business outperforming the market and a positive response to new clothing lines after a challenging first half.
“Our transformation plan is now running at a pace and scale not seen before at Marks & Spencer. For the first time we are beginning to see the potential from the far reaching changes we are making,” he said.
With its acquisition of 50% of Ocado Retail now complete, M&S said plans to transition to the M&S range were on track. Meanwhile, the continued overhaul of its store estate saw the closure of another 17 full-line outlets as it moves towards becoming a “digital first” retailer. The group also delivered cost savings of around £75m in the half.
Commenting on the results, Richard Lim, CEO at consultancy Retail Economics said: “Product selection remains a key issue for the retailer with a confused proposition across some parts of the business. Put simply, their core proposition in non-food has failed to resonate with their core customer base for seasons.
“While progress continues to be made in their transformational strategies, the race is on to fix its broken business model to remain relevant for today’s consumers. The sector is evolving at an unprecedented pace and some of the deep-rooted challenges in the business are proving extremely challenging to resolve.”
Neil Wilson, chief market analyst at Markets.com, added: “By its own admission, the effort to shake up clothing and home has fallen behind.
“The string of high level departures points to the trouble. Steve Rowe has taken over directly and binned senior staff. It’s never a great plan for a CEO to go down this route, but progress was too slow.
“But if it doesn’t pay off, will his head be the next to roll?”
After M&S lost its place in the prestigious FTSE 100 index earlier this year, the group’s share price was up nearly 6% this morning on hopes that there would be some improvement in trading in its second half.
NAM Implications:
- Given two radically different business models, time to divide food and non-food.
- This would allow the two divisions to stand alone, clearly differentiated…
- …and also allow suppliers to work with greater clarity of the trading environment…
- …and perhaps trade-invest with greater confidence?
