M&S says downturn to last longer

By Mark Potter

LONDON (Reuters) - Marks and Spencer issued a shock profit warning and said the consumer downturn was likely to be deeper and last longer than previously expected, sending its shares plunging 25 percent to a near seven-year low.

The clothes, food and homewares group said on Wednesday sales at UK stores open over a year fell 5.3 percent in the 13 weeks to June 28 and its upmarket food business had lost market share as cash-strapped shoppers switched to cheaper rivals.

In a trading update rushed out a week earlier than planned, it said Steven Esom, head of food, was leaving after just one year in the job and that it would look at more initiatives like its "Dine In for 10 pounds" campaign to lure back custom.

The sales plunge, which Executive Chairman Stuart Rose described as "effectively an earnings downgrade", heaps pressure on Rose a week before a shareholder vote to confirm his move up from chief executive, against corporate governance guidelines.

"Regrettably we feel that the credibility of senior management has been irreparably damaged by both the degree of profit erosion ... and the lack of any clear idea from management that they have a grip of problems," Credit Suisse analysts said in a research note.

Rose told reporters he was very confident of being approved as executive chairman, and said other retailers would follow suit with profit warnings.

"I can't believe this is a Marks & Spencer (M&S) exclusive problem, I think this is definitely a retail slowdown and we don't know where it's going," he said on a conference call.

Kaupthing analysts agreed, and shares in rivals such as clothing group Next and supermarket chain J Sainsbury also fell.

"A raft of downgrades appears likely," they said.

But Panmure Gordon's Philip Dorgan said the "terrible" trading update was "at least half M&S specific," arguing its food business lacked scale, was threatened by premium ranges at supermarkets and was high price and also high cost.

M&S's update adds to signs indebted shoppers are cutting back on luxuries amid rising fuel, food and mortgage costs.

Industry data from TNS Worldpanel last week showed that sales at discount supermarket group Aldi surged 21 percent in the 12 weeks to June 15 on the same period the year before, while more expensive rivals like M&S and Sainsbury lost ground.

Rose said the consumer downturn was likely to be "longer and harder fought" than previously expected.

"This is certainly going to go right through into 2009. There is absolutely no sign of relief," he said.

PROFITS PLUNGE