M&S says turnaround plan to hit profit in short term

Marks and Spencer has posted sliding annual earnings. (AFP)

LONDON: A warning from Marks & Spencer’s new boss of a short-term profit hit from efforts to turn around its clothing business by cutting prices and improving ranges knocked its shares on Wednesday.
Steve Rowe, a 26-year M&S veteran, replaced Marc Bolland as chief executive of the 132-year-old British retailer last month with a remit to revive clothing, which contributes about 60 percent of profit but has seen five years of falling sales.
Rowe said he would focus on M&S’s most loyal customer, a 50-year-old woman he described as “Mrs M&S,” who had been neglected in the chase for younger, more fashion-conscious shoppers.
The warning that it would take time for customers to notice the improvements and return to M&S stores to buy products other than its successful food ranges, combined with the impact on its margin forecast shocked some investors, who experienced several such “turnaround” plans during Bolland’s six years in charge.
M&S, which has long been Britain’s biggest clothing retailer, has seen its sales eroded by rivals like Next and a push from supermarkets into family clothing while younger shoppers favor Primark and H&M’s cheap prices and more fashionable clothes or online stores like ASOS.
Rowe’s plan is to focus on improvements to the quality, fit and availability of M&S’s ranges, while lowering prices and reducing the proportion of sales on promotion.
Together with difficult trading conditions this “will have an adverse effect on profit in the short term” he said.
M&S shares, which are down a quarter over the last year, were trading 8.9 percent lower at 405 pence at 1157 GMT.

Some analysts were skeptical. “There is no easy fix for the general merchandise business,” said Freddie George at broker Cantor Fitzgerald, who has a “sell” rating on the company.
However, one large institutional investor, who spoke on the condition of anonymity, said they were supportive of Rowe’s strategy and were willing to give him time.
Rowe forecast that the sales trends this year would be similar to last, when like-for-like sales in clothing and homewares fell 2.9 percent.
Lower prices, and currency pressure, would also limit an improvement in the gross margin to 50-100 points. This was below expectations and further unnerved the market after M&S had made big strides in boosting margins under its previous CEO.
Analysts at UBS said the new guidance implied about a 10 percent downgrade to consensus profit forecasts, which prior to Wednesday’s financial update were 710 pounds and 744 million pounds for 2016-17 and 2017-18 respectively.
M&S reported a 2.4 percent rise in revenue to 10.6 billion pounds ($15.5 billion) for the year to April 2.
Underlying pretax profit came in at 689.6 million pounds, beating analysts’ average forecast of 673 million pounds and the 661.2 million pounds made in 2014-15.