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M&S higher as profits beat estimates, but clothing sales still drag

 
David Madden
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Marks and Spencers Profit Decline
M&S to cut back on clothing. (Source: Getty)

Shares in Marks and Spencer are higher today as the headline profit figure topped analysts’ estimates.

Full-year underlying pre-tax profits fell by 5.4 per cent to £580.9 million, while the consensus estimate was for £573 million. The retailer had one-off costs of £514.1 million, of which £321 million was for UK store closures. When you factor in the exceptional items, profits fell by £61.2 per cent to £66.8 million. The company plans to aggressively close more stores in the coming years, so we can expect further costs in relation to the restructuring.

Marks and Spencer finished the year on a low note. Fourth-quarter like-for-like clothing sales dropped by 3.4 per cent, while analysts were expecting a fall of only 1.3 per cent. The clothing division has been underperforming, and these figures highlight the poor state of the department. Fourth-quarter food sales jumped by 3.2 per cent, but when you strip out new stores it fell by 0.6 per cent. The food division has been keeping the carrying the company in recent years, and now we are seeing it go through a soft patch.

Marks and Spencer expects gross margin to fall between 0 and 50 basis points as input cost inflation and price investments are expected to weigh on the bottom line. This outlook won’t give much comfort to investors as the company has been muddling along recently.

Marks and Spencer has already closed 22 stores, and it plans to cut more than 100 stores by 2022. The ‘radical transformation’ is a part of the wider plan to reduce the amount of shop floor that is allocated to the clothing division. The aim is to reduce the space for clothing by 5 per cent by years end.

Despite the drastic changes to the company, and the reorganisational costs, the final dividend was left unchanged at 18.7p, while net debt was cut by 5.5 per cent. This suggest the board are not overly concerned about the financial health of the company.

The first-half and third-quarter figures from the company weren’t too hot, especially as the all-important Christmas period was mixed. The results were only relatively good, as companies like Zara, Moss Bros, and Debenhams have been struggling. British consumers are under a little less pressure, now that inflation dipped and average wages are creeping higher. Since Marks and Spencer are coping better than most retailers, they could be in line for a better run in the next few months.

The retailer is continuing with its plans to obtain more sales online. Mr Rowe has a good grasp about which way the entire retailer sector is heading, and that is why he is keen to close stores that are under performing, and try and focus more on the e-commerce angle. The company has been shutting stores, and seeing a lot of the business flow over to nearby Marks and Spencers stores – so customer loyalty is strong. This should stand to the firm as it sticks to the path of slowly reducing its presence on the high street.

According to GlobalData, Marks and Spencer held 13.5 per cent of the British clothing sector in 1997. Now the retailers has 7.5 per cent, narrowly ahead of Primark who have a 7 per cent share of the market. These figures highlight how much ground the firm has lost, and underlines the need for major change.

The stock has been in a downtrend since 2015, but it has bounced back since April, and if it clears 308p – the 200-day moving average, it could target 328p. A break below 277p, it could pave the way for 262p to be retested.

Based on CMC Platform Prices. Indicitive only.

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