The ongoing outperformance of food is making M&S a structurally lower gross margin business, with food gross margin around 20 basis points lower than of clothing. Clothing still accounts for roughly half of profits, however, so issues there are in need of a solution and the management changes are thus positive, but most don't occur until October, so it is very early days...For the time being we make no change to our £690m forecast, although see risk as to the downside.
First quarter trading was in line with market fears and recent press reports...While not helped by the poor weather, womenswear sales appear disappointing relative to Next and Debenhams, reflecting continued internal issues in ranging and merchandising... While first quarter sales trends were in keeping with market fears, our full-year like-for-like expectation of 1.8 per cent looks too optimistic. We expect to cut our 2013 pre-tax profit to £690m from £753.6m
M&S has reported a first quarter on the weaker side of consensus overall... Although the shares continue to trade at a significant discount to their historical average valuation, we continue to rate them “hold” as we wait for staff moves to settle down and for signs that weakness in general merchandise (for example loss of clothing market share) has been arrested. We prefer to recommend buying shares in Next instead, and in the mid cap space, NBrown, Asos or Dunelm.