May 23, 2018 / 6:22 AM / in a month

Britain's M&S says modernising rapidly to survive

LONDON (Reuters) - Marks & Spencer (MKS.L) is modernising rapidly to survive and has finally found a strategy that will deliver the profitable, growing business craved by investors, the British retailer said on Wednesday.

The 134-year-old clothing and food group reported a second straight annual profit fall and booked a 321 million pound ($429 million) charge for a major store closure program.

But its shares rose as much as 7 percent as the underlying profit beat analysts’ forecasts, the company committed to maintaining its dividend and investors covered short positions.

M&S, one of Britain’s best known retailers, faces unrelenting competition from supermarkets and discounters, fashion chains like Zara, H&M and Primark, as well as Amazon, while pressure on consumer spending is hampering efforts to revive its business.

“If anything the need for change has become more urgent. Accelerated change in the business is therefore our only option,” Chief Executive Steve Rowe told reporters.

In November, two months after retail veteran Archie Norman joined as chairman, M&S detailed its latest attempt at a turnaround after over a decade of failed reinventions - a five-year program of store closures and relocations to cut excess selling space in its clothing business and moves to make its misfiring food business more competitive.

On Tuesday, M&S said it would close 100 UK stores by 2022, as it strives to make at least a third of clothing and home sales online.

‘FALSE DAWN’

“We’re deeply conscious of the fact that our middle name is ‘false dawn’,” Norman told reporters.

He said previous managements had failed because M&S’s organization and culture made radical change very hard.

It would be different under his and Rowe’s leadership.

“I’m convinced that this is a turning point in our history,” said Norman.

“What Steve is leading is a complete fracturing of the old culture and a re-shaping of the organization, creating the capacity to attract really talented, class people to come and join us on what is the most exciting project in British retailing,” he said.

“Seeing is believing, so just watch this space.”

Prior to Wednesday’s update, M&S shares had fallen 26 percent over the previous 12 months, putting the stock in danger of being booted out of the FTSE 100 index.

It is now worth less than both online grocer Condo (OCDO.L) and online fashion website ASOS (ASOS.L), starkly illustrating how shopping habits have changed in a decade.

Slideshow (4 Images)

“It’s of no interest to me,” Norman said of the prospect of relegation.

“I hope the share price does well but I haven’t even looked at it today, I don’t plan to look at it tomorrow, I plan to look at it in three to five years time,” he said.

“We’re here to create long term shareholder value, to create a profitable growing business in three to five years time.”

To view a graphic on Marks and Spencer shares vs FTSE, Ocado and Next, click: reut.rs/2KPepen

SHORT TERM COSTS

Rowe, an M&S lifer who has been CEO for two years, said the firm was tackling the structural issues it faces at pace, making it a faster, lower cost and more commercial digital business.

In addition to the accelerated store overhaul, M&S is improving its website and investing to increase its e-commerce capacity.

“These changes come with short term costs which are reflected in today’s results,” said Rowe.

M&S made a pretax profit before one-off items of 580.9 million pounds in the year to March 31, particularly hurt by a 140 basis points decrease in the food gross margin.

After taking account of special items of 514.1 million pounds, including the store closure charge, pretax profit fell 62 percent to 66.8 million pounds.

Turnover was broadly flat at 10.7 billion pounds, though the dividend was held at 18.7 pence a share.

M&S lost more ground in its fourth quarter, with like-for-like clothing and home sales down 3.4 percent and same store food sales down 0.6 percent. Analysts are forecasting another profit fall in the 2018/19 year.

“For investors a dividend yield of over 6 percent is an attractive stopgap, but at the moment Rowe’s promise to make M&S special again requires a leap of faith,” said Hargreaves Lansdown analyst Laith Khalaf.

M&S is not the only retailer finding the going tough. New Look, Mothercare (MTC.L), Carpetright (CPRC.L) and House of Fraser are all shutting stores.

And Toys R Us, electricals group Maplin as well as drinks wholesaler Conviviality have all collapsed this year.

Additional reporting by Paul Sandle and Sarah Young, Editing by Alexander Smith and Mark Potter

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