Wednesday 25 May 2016 7:08 am

Marks & Spencer profits drop by a fifth as Steve Rowe sets out plans to revive clothing business

Marks & Spencer's share price fell more than 8.3 per cent this morning, despite pre-tax profits falling by nearly a fifth in the last year, as new management unveiled plans to tackle the struggling clothing division. 

The figures

Group revenue at M&S was up 2.4 per cent to £10.6bn for the 53 weeks to 2 April, while underlying pre-tax profit rose 4.3 per cent to £689.6m. 

But pre-tax profit fell 18.5 per cent, down to £488.8m as basic earnings per share dropped 16.2 per cent to 24.9p. 

The retailer was affected by one-off costs including £100m relating to ongoing issues with its international business and a £50m insurance misselling charge relating to M&S Bank. 

Food continued to perform well, but clothing was down 2.9 per cent – "unsatisfactory" the group said – although "actions" are now "under way". 

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Why it's interesting

Chief executive Steve Rowe is using today's results to set out his stall for the future of the business, having carried out a "forensic" review during his first six weeks at the helm of the retailer. 

Rowe admitted sales in clothing have been "unsatisfactory for a number of years" and pledging to focus on a number of key issues including ditching fashion trends in favour of "accessible products [our customers] can wear with confidence".

Read more: What Steve Rowe is planning to fix M&S

Quality – which was an area that former chief executive Marc Bolland pledged to address – also features high on Rowe's list of things to improve, as does M&S' price position, which he said he will address by "investing in everyday price and reducing the number of promotions and sales".

It also sounds as though Rowe is planning to cut back some of the M&S range of brands, which has become unwieldy in recent years, and by reducing the total number of products it sells in clothing in time for the autumn/winter range this year. 

M&S will invest more in staff and actually expand the team, as well as improving in store facilities.  

Some basic changes to the environment, coupled with great service, can turn a shopping trip into an experience.

What M&S said

Rowe said: “M&S is a great business with a strong customer base and loyal employees and we have much to be proud of. We also know that we have lots of opportunities to improve and be better for our customers, our employees and our shareholders. We are putting customers right at the heart of our business.

“Our results last year were mixed. We continued to outperform on food but we underperformed on clothing and home sales. This is not satisfactory and today we are outlining our initial plans to address the issues and to position Marks & Spencer to deliver profitable sales growth.

“We are clear on the actions needed to recover and grow clothing and home, which is our top priority; to continue to grow our Food business; and to focus on driving profitability. We are investing to re-establish our price position by sharpening prices and to enhance service by putting more employees into our stores.

“These actions, combined with the difficult trading conditions, will have an adverse effect on profit in the short term. We are, however, confident that our commitment to delivering the right product, price and service will help return clothing and home sales to growth. This, together with continued momentum in Food, will provide us with a solid base from which to build a long term sustainable business."

What analysts said

Alex Joyner, senior analyst at Galvan Research, said: As we expected, Steve Rowe has kitchen sinked M&S today.

"He’s highlighted a long list of problems with its troubled clothing business and has pledged to turn things around.

"While his overhaul plans sound encouraging on the face of it, we think they’ll do little to reassure long-term M&S investors who’ve heard it all before. Marc Bolland made similar promises during his tenure, but still failed to breathe new life into the retailer, despite investing £2.3bn."

Independent analyst Nick Bubb said: "It's a bit disappointing that although the future focus of the business will be on “the customer”, it is not clear who Steve Rowe thinks 'the M&S customer' actually is…and that the key decisions on how much UK store space is needed for clothing and homewares, relative to food, have been put off until the autumn."

Steve Clayton, head of equity research at Hargreaves Lansdown, said: "A focus on customer service, pricing and fewer promotional sales are part of the new strategy set out today, which will include a review of their UK store estate, likely to result in a reduction in square footage. We won’t know whether this means store closures and won’t find out until the autumn. In the short term profits will suffer and shareholders are being paid a special dividend to dull the pain.

"M&S has 8.5 per cent market share, so is still the UK’s largest clothing retailer by value and with 32 million customers, there are plenty of relationships to strengthen. But so far, there is little we can see in the strategic review that hasn’t been tried before at the company”

AJ Bell investment director Russ Mould added: “The promise of ‘jam tomorrow’ is rarely appealing to investors especially if it is accompanied by some short-term pain."

Phil Dorrell, partner at Retail Remedy said: "If M&S can take the lessons from the food hall and transfer them over into the fashion space, in particular womenswear, there is a real possibility that they can return to the retail powerhouse of our distant memories. But we've known that for some time, and still we wait."

In short

Rowe has already started work but it'll be a mammoth task to return M&S to its former glory. 

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