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UPDATE 3-Britain's M&S shows signs of improvement as clothing sales rise
April 10, 2014 / 7:01 AM / in 4 years

UPDATE 3-Britain's M&S shows signs of improvement as clothing sales rise

* Q4 general merchandise like-for-like sales down 0.6 pct

* Clothing like-for-like sales up 0.6 pct; Food up 0.1 pct

* CEO says firm showing “step by step” improvement

* M&S expected to make less annual profit than Next for first time

* Shares rise up to 3.3 pct, then fall back (Adds detail, CEO, investor comment, shares)

By James Davey

LONDON, April 10 (Reuters) - British retailer Marks & Spencer posted its best quarterly performance in clothing for three years, indicating its turnaround plan may finally be gaining traction after billions of pounds of investment and several false dawns.

Marc Bolland, chief executive since 2010, is at the end of a three-year, 2.3 billion pounds ($3.9 billion) plan to address decades of under-investment.

The 130-year-old firm has tried to shake off criticism that its clothes are dowdy, with its new strategy focusing on higher quality and more fashionable styles as it seeks to satisfy its core customers aged 45 and over, while also appealing to younger shoppers.

Bolland has also spent heavily on redesigning stores and overhauling logistics to complement a new Internet platform, aiming to turn M&S into an international retailer that reaches customers through stores, the web and mobile devices and is better able to compete with faster-growing rivals like Next .

Shares in Britain’s No.1 clothing retailer, which also sells homeware and upmarket food, have increased 20 percent over the last year on recovery hopes and rose up to 3.3 percent in early trading on Thursday after it said clothing sales at stores open over a year rose 0.6 percent in the 13 weeks to March 29.

But the share price fell back after M&S’s analysts call, to be down 1.9 percent at 1237 GMT, reflecting concern about narrowing margins and also disappointment that Bolland is keeping investors waiting for a strategic update until 2013-14 results are published on May 20.

“The numbers are nothing sparkling but they’re a little bit better than people had feared,” said a fund manager at one of M&S’s top ten shareholders.

“They’ve been in a real investment phase ... It just needs some time for that to bed in now.”

A new clothing team set up in July 2012 and led by John Dixon, the former head of food, has previously failed to deliver an anticipated pick-up in sales, including at Christmas, despite new ranges receiving generally positive reviews.

“Womenswear was encouraging with a performance ahead of clothing and clear signs of improvement,” Bolland told reporters. “We have always said we will improve step by step.”

New fashion ranges have been backed by high-profile advertising campaigns featuring some of Britain’s biggest female celebrities, such as singer Rita Ora, actress Emma Thompson and model Alek Wek.

“There is more (being) sold in better and best (priced clothing). There is interest from people in higher quality clothing that we are satisfying,” said Bolland.

MARGIN GUIDANCE CUT

Clothing forms part of M&S’s general merchandise division, which also includes homeware and footwear.

Fourth quarter like-for-like sales in the division fell 0.6 percent, an eleventh straight quarterly fall, partly reflecting the impact of the absence of an Easter holiday in the quarter on homeware sales and reduced marketing for online homeware sales as the firm moved to its new Internet platform.

That outcome compared with a third-quarter decline of 2.1 percent and was towards the top of a range of analysts’ forecasts of a fall of between 0.5 percent and 1.5 percent.

“Although hardly a stellar performance, ... (it) is the first positive figure in (the clothing part of) general merchandise in almost three years and does suggest that the new management team may be making progress,” analysts at Morgan Stanley said.

But despite the improving sales picture, M&S cut its UK gross margin guidance for the 2013-14 year to a fall of 20 basis points from flat previously, reflecting lower prices in “a highly promotional market”.

In May the firm is expected to report a third straight fall in annual profit. Analysts are forecasting a profit before tax and one-off items of about 615-620 million pounds - that would be 7 percent less than M&S made in 2012-13 and for the first time less than Next’s annual profit.

Bolland will also miss a revised target he set in 2012 to increase total sales to 10.8-11.5 billion pounds in the 2013-14 year. Analysts are forecasting about 10.3 billion pounds.

“We’d need to see the clothing improvement continue for another three to four quarters at least before we can even talk of a turnaround,” said James McGregor, director of retail consultants, Retail Remedy.

M&S’s food business, which contributes over half of group sales but less profit, is performing better, though here growth slowed due to the timing of Easter.

Like-for-like food sales rose 0.1 percent versus analysts’ forecasts in a range of flat to up 0.5 percent, and against a third-quarter rise of 1.6 percent. The outcome, an eighteenth straight quarter of growth, represented an outperformance of the wider grocery market.

Adjusting for the absence of Easter in the period, like-for-like food sales were up 1.8 percent, M&S said.

$1 = 0.5971 British pounds Reporting by James Davey; Editing by Kate Holton and Pravin Char

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