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M&S speeds up transformation process as profits continue downwards

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M&S ramps up revamp as online sales drop 0.2%
M&S ramps up revamp as online sales drop 0.2%
Sharelines

M&S profits continue to slide, dragged down again by clothing, but there is some light at the end of the tunnel

M&S, reporting its first half year trading results since being dumped out of the FTSE 100 in September, has seen a further decline in pre-tax profits, although declines in clothing and homewares have slowed. The company is pledging to ramp up its transformation process to help continue this turnaround.

 

Profit before tax and adjusting items was down 17.1%, after weak first half Clothing & Home sales, however, profit before tax was up 51.5% at £153.5m, due to lower net adjusting items in the period compared to prior year.

 

Food like-for-like sales grew by 0.9% driven by volume, with gross margin rate slightly down, reflecting investment in trusted value. Clothing & Home like-for-like sales were down 5.5%, reflecting first half shape of buy and supply chain issues, but this was slightly better than expected.

 

Online sales, however, were down 0.2%.

 

The retailer’s transformation process continues at pace, with further action on UK store estate reshaping rapidly underway, with 17 full-line stores closed and cost savings of around £75m delivered in the half. There is light at the end of the tunnel.

 

Steve Rowe, Chief Executive, comments: “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. The Food business is outperforming the market. Our deal to create a joint venture with Ocado is complete and plans to transition to the M&S range are on track.”

 

Rowe expands: “In Clothing & Home we are making up for lost time. We are still in the early stages, but we are clear on the issues we need to fix and, after a challenging first half, we are seeing a positive response to this season’s contemporary styling and better value product. We have taken decisive action to trade the ranges with improved availability and shorter clearance periods. In some instances dramatic sales uplifts in categories where we have restored value, style and availability illustrate the latent potential and enduring broad appeal of our brand. Our cost reduction and store technology programmes are on track.”

 

Analysts, however, remain concerned about M&S’s long term future. “There was certainly some good news for investors, but today’s rally in the share price may be more out of relief than anything else,” says Ian Forrest Investment Research Analyst at The Share Centre. “While the £75m in cost savings is welcome, the shares are still down 20% on the year and the market will want to see the improved performance feed through clearly into rising profits and better dividends. Online sales growth of just 0.2% will need to improve significantly and the company needs to demonstrate further benefits from its large restructuring process in order to fully restore investor confidence.”

 

The clothing arm of the business also really needs some attention, believes Steve Miley, a senior market analyst at www.asktraders.com. “The food sector continues to be the star performer in the business, impressing investors with like for like sales. However, these failed to make up for the soft like for like clothes sales, the clothes sector was once again the weakest link in what has almost become a tradition,” he says. “Marks is failing to get a grip on its unravelling clothes business which has been its Achilles heel now for far too long.”

 

Angus Burrell, Head of Omni-Channel Solutions at Valitor, agrees that M&S is now in a crucial phase. “M&S is attempting one of the most radical transformations in retail and all in the run up to Christmas - the most critical time for sales. This is truly the make or break moment for M&S as we know it.” He says.

 

But there are glimmers of hope, believes Miley. “Whilst the results left a lot to be desired, investors are more confident about the future of Marks and Spencer as cost savings kick in from store closures and as investors look forward to M&S products being available on Ocado as from next September,” he says. “The stock jumped 5% in early trade reflecting investors optimism for the company going forward.”

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