Marks & Spencer warns of sales drag but profits rise

Marks & Spencer has warned of a challenging outlook for sales growth as it reported a decline in half-year revenue, but surprised the market with a higher profit figure.

The retailer has already been closing some stores, including this branch in Falkirk. Picture: Michael Gillen

Revenue dropped by 3.1 per cent to £4.96 billion, reflecting declining sales in both the food and clothing and home divisions.

M&S said it does not expect much improvement in sales in the near future, as it deals with “the growth of online competition and the march of the discounters”.

“Therefore, as we embark on the difficult early stages of transformation, we are expecting little improvement in sales trajectory,” the high street stalwart said.

The retailer has already announced plans to close about 100 stores in the UK as well as exiting some international markets, but said “significant further change” is required.

Clothing and home revenue fell by 2.7 per cent as a result of the strategy to close underperforming stores and reduce the amount of in-store space dedicated to non-food items. Like-for-like sales declined by 1.1 per cent.

Food revenue dipped by just 0.2 per cent overall, but like-for-like sales slipped by 2.9 per cent due to the use of fewer promotions and the timing of Easter.

Underlying pre-tax profits rose 2 per cent to £223.5 million, compared with £219.1m a year earlier. Consensus forecasts had pointed to a decline in profits to £203m.

M&S said the improved profit was due to the phasing of costs, but full-year cost guidance remains the same.

Chief executive Steve Rowe said the retailer was “leaving no stone unturned” in its radical transformation plan.

“We are on track to restructure our store portfolio with over 100 full-line closures and expect to see newly remodelled stores open next year,” he said.

“We are fixing the basics of our online channel and there are very early signs of improvement. Every aspect of our ranges, how we trade, our supply chain and marketing is undergoing scrutiny and change.”

Capital expenditure is now expected to be between £300m and £350m before disposals, lower than a previous estimate of up to £400m.

John Moore, senior investment manager at Brewin Dolphin, said: “Marks & Spencer’s sales continue to suffer, reflecting the difficult retail environment and mistakes that the company has made in the past in terms of its offering and retail positioning.

“Underneath the headline sales figures there was an encouraging financial performance, with free cashflow up and debt levels down – this will provide headroom for the business to invest in much-needed changes to its offering, format, and delivery.

“After all, the company has yet to put in place a food delivery strategy which most customers now expect. However, Marks & Spencer’s fortunes will depend more heavily on its ability to change and innovate in these kinds of areas than has been the case in the past and that is a risk for investors.”