Marks & Spencer half-year sales disappoint
By Oliver Haill
Date: Wednesday 07 Nov 2018
(Sharecast News) - Marks & Spencer said it was leaving "no stone unturned" in its efforts to restructure the business to cope with the new retail environment, where sales and profit margins fell in the first half of the year.
The retailer's food like-for-like sales fell 2.9% amid tough competition in the supermarket sector and management's decision to run fewer promotions and invest in overall prices, while clothing and home sales shrank 1.1%.
The food business had for years been the reliable growth vehicle while successive management teams struggled to repair the general merchandise arm. Management, led by chief executive Steve Rowe and chairman Archie Norman, acknowledged a weakness in the food supply chain and that stores had become excessively dependent on short-term promotions and overly complex multi-buys including the profit-diluting 'Dine In' programme.
A programme to "reengineer" food categories and cut prices has begun to transition to a new "trusted value" proposition, but this has hit sales and this is expected to continue in the lead up to Christmas.
Across the group, 29 shops have been shuttered and the company remains on track to close the planned 100 food-and-clothes stores as part of an accelerated restructuring programme announced in May. Rowe reiterated that to cope with the structural change in the industry. "we are leaving no stone unturned and reshaping our business, its organisation and culture".
After much recent speculation that the company could be split into food and GM businesses, Rowe told the BBC on Wednesday: "We are not breaking up the family."
Underlying profit before tax of £223.5m was 2% higher, well above the £188-212m range of forecasts from City analysts, but this was a result of earlier phasing of cost cuts, with full year cost guidance unchanged. Underlying earnings per share came out slightly better than expected at 10.6p and statutory profits, which included £47.6m for UK store closures, were up 7% to £126.7m.
The dividend, which some have cited as a stone around management's neck as they look to restructure, was held at 6.8p for the half-year.
On the outlook for the second half, the company said: "Trading conditions remain challenging and the headwinds from the growth of online competition and the march of the discounters remain strong in all our markets. Therefore, as we embark on the difficult early stages of transformation we are expecting little improvement in sales trajectory."
While management frankly admitted that the website and online fulfilment capability "remain well behind the best of our competitors", one of the positives in the results was the 9.1% growth in online sales growth of UK clothing & home, with a fifth of GM sales now online versus 18.2% a year ago.
Capital expenditure plans for the full year were cut by £50m to £300-350m, while the rest of guidance was left unchanged.
MARKET REACTION & ANALYSIS
M&S shares fell more than 3% to 292.4p on Wednesday morning.
House broker Shore Capital cut its full year PBT forecast roughly 3% to £528m due to the poor food sales.
The drop in the like-for-like sales is the real worry, said Neil Wilson at Markets.com: "Food is arguably the biggest concern as it is no longer supporting the clothing weakness anymore. The key questions for M&S is whether it can get its product lines right, whether the store closures are working, and whether it can get online right."
Broker Liberum kept its 'sell' rating on the shares. Analysts said: "While there is limited progress on transformation, to execute major change when both sides of the business are going backwards exacerbates risk, disruption and heightens the impacts to both the P&L and cash flows. It is also difficult to adequately invest behind, and prepare for peak trading when both businesses are deteriorating at an increasingly worse rate. The market is likely underestimating the impact on the cash and balance sheet costs associated with the ongoing reviews."
RBC Capital Markets noted that M&S expects to be 35-40% through the store closure programme by the end of the year and is seeing better than expected sales transfers to existing stores of circa 30%. The new regional distribution centre at Welham Green will open in the spring and it will have a third more capacity at its ecommerce centre at Castle Donnington over the peak season. "There may be more store closures in time given the ongoing channel shift in the sector."
"With a free cashflow yield of almost 10% and a dividend yield of c.6%, investors are being paid to wait for operational improvements to come through," RBC said, suggesting that the dividend is "well protected" and that there remains "a substantial cost reduction opportunity".
Russ Mould, investment director at AJ Bell, was less positive, seeing "no end in sight" for "the world's most frustrating recovery story", though he said removing the confusing promotions in food "looks to be the correct decision, up to a point".
He added: "Marks & Spencer needs to live up to its reputation of quality products while also being more competitive on pricing. However, one has to wonder if there is a risk in the business swinging the needle too far towards budget territory.
"For example, you can now get a packet of chocolate biscuits in Marks & Spencer for a mere 75p which puts it in competition with mainstream supermarkets. Surely that threatens the appeal of its higher priced, premium products as customers may just plump for the cheapest option - in essence Marks & Spencer's value range could cannibalise sales of its other ranges. Value doesn't always have to mean low prices. A Marks & Spencer customer needs to feel they are getting great value for the price they are paying, and that still applies if they are paying slightly more than they would in Tesco for a product that is also better quality.
"As for clothing, the decision to reduce the number of options looks wise as long as it doesn't forget its unique selling point, namely stocking a wide range of different sizes per line."
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