There were not expectations of a strong set of results from Marks & Spencer today. The profit drop was expected and profit before tax of £532m was actually in the higher end of the forecast range.
However, a share price decline of four per cent shows that these were still a disappointing set of results for investors.
The retailer’s management team are taking drastic action to try and stop the rot, slashing unprofitable stores and embarking on a joint venture with online food delivery company Ocado.
M&S's £750m Ocado deal is overpriced
To fund the Ocado deal M&S aims to raise £601.3m via a rights issue at 185p per ordinary share, a discount of 31.8 per cent to the previous day's closing price.
Richard Hunter, head of markets at Interactive Investor, said: “It remains to be seen whether the high price, which will be largely funded by a £601m rights issue, is justified but there is little doubt that there is much potential for the tie-up if executed correctly.”
City Index market analyst Fiona Cincotta said the discount on the rights issue could raise concerns that the Ocado JV is overpriced.
“The company's uncertain future is reflected in the eye-watering deep discount that has been applied to the capital raising,” she said.
Read more: M&S buying growth with Ocado?
"The Ocado deal may well offer this increasingly irrelevant old retailer a new lease on life, but the size of the discount on the equity raising will only stoke concerns that M&S has paid too much.
"Investors will have to wait until the back end of next year to see if the deal can start bearing the requisite fruit."
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said the tie-up could lead to shoppers buying bigger bags of M&S goods.
“M&S has lagged behind the bigger supermarkets in the online food space and this deal aims to turn that around. It’s a smart solution, as not many people tend to do a whole big shop with M&S, so by holding hands with Ocado, more of the group’s products will end up in the weekly online-shopping bags,” she said.
Dividend cut is risky, but is a long-term bet
The company today slashed its dividend by 25 per cent to 13.9p a share as it tried to free up cash for investment.
The move was welcomed by some analysts who thought it showed management were serious about trying to transform the company’s fortunes.
"Management is at least in the right head space by cutting the dividend and giving more priority to investment," Cincotta said.
However, Paul Mumford at Cavendish Asset Management argued that that cutting the dividend to invest in the Ocado deal was a risky approach.
"M&S has embarked upon a high risk strategy and has admitted to being in the "difficult" early stages of a ‘transformation programme’. For shareholders, who have been asked to stump up £600m for the deeply discounted rights issue and are facing a cut in dividend payment, this is hardly encouraging. And these funds are being put to questionable use, with the joint venture with Ocado unlikely to be profitable for some time,” he said
Falling sales shows fashion lines need a fix
Marks & Spencer has long battled to stem falling clothes sales, while its convenient food offering has remained popular.
However, the results today showed sales declines in both clothes and food with UK food revenue down 0.6 per cent and UK clothing and home revenue down 3.6 per cent.
Hunter said: “Even after an attempt to inject life into clothing sales, the company has suffered from poor availability of some lines, with the supply chain clearly in need of a shake-up. Meanwhile, even the food business, which has been the jewel in the crown for some considerable time, has shown some signs of slowing growth.”
The company said it expects food sales to decline one per cent this year and clothing and home sales to fall three per cent, blaming store closures.
Ian Forrest, investment research analyst at The Share Centre, said:"The fact that sales are still expected to drop this year suggests the turnaround is still some way off."
85 more store will close
Marks & Spencer embarked on a store closure campaign last year, shutting 35 stores by the year end. It said today it will close a further 85 stores and 25 branches of its food-only offering Simply Food.
David Madden of CMC Markets said: “The group has been quick to implement its transformation plan, and it has shut nearly half of the 100 stores it selected for closure, and the retailer aims to have cost savings of at least £350 million by 2020/21."
Lund-Yates said: "The acceleration of the store closure programme is hurting sales and profits for now, but it’s a bold move in challenging times. Cutting costs and re-energising both the food and clothing business all makes sense, but investors are yet to see if these big strides will actually take M&S out of the woods.”