Marks & Spencer set to join tepid sales trend after warm autumn

<p>The UK’s famously unpredictable weather is likely to continue featuring in financial headlines over the next week or so, when more big-name clothing retailers report […]</p>

The UK’s famously unpredictable weather is likely to continue featuring in financial headlines over the next week or so, when more big-name clothing retailers report quarterly earnings.

Marks & Spencer Plc. could be next in the firing line, when it announces half-year results tomorrow (5th November).


Marks, which is amongst the UK’s biggest clothing retailers by sales volumes, is likely to follow a trend set in recent months by blaming the weather for softening sales.

Next Plc. the clothing, footwear and home products retailer, was first to do this, when it gave a conditional warning late in September, followed by a full weather-beaten profit warning late in October.

It trimmed its expected fourth-quarter revenue growth to just 1% from 4% before.


Primark weathers heat with sales surge

Still, Primark-owner Associated British Foods on Tuesday bucked the trend, by reporting a 6% advance in earnings per share.

ABF singled-out its discount fashion chain as playing a significant part in underpinning its earnings, along with grocery operations, whilst ABF’s ingredients division continued to sag.

Primark full-year sales advanced 16% to £4.95bn, enabling a 29% rise in adjusted operating profit to £662m, with the chain having been confident enough during the year to increase retail store space by more than 10%.

Whilst ABF’s results were ultimately mediocre, due to slack in its other divisions, Primark’s remarkably robust performance poses a challenge to a number of other clothing and apparel sellers on the high street.

In stark contrast to Next, and SuperGroup Plc., which announced results a few days ago, ABF’s CEO George Weston decried any negative weather impact.

Responding to a question about unseasonably warm weather in an interview with Reuters, he said: “I’m really not concerned (by the weather) and we haven’t had to delay or cancel any orders”.

“Yes, there’s been an (weather) effect, but … every year you get unseasonal weather at some point” he added.



M&S may have excuses at the ready

Marks looks set to report its 13th quarterly fall in underlying non-food sales in a row.

We expect the firm to blame the warm autumn weather, as yet unresolved teething problems at its relatively new website, and a sluggish economic recovery, for soft earnings.

The fall in sales of general merchandise – clothing, footwear and home wares – is expected to be 3.7% on a like-for-like basis—that is comparing only sales from shops open over a year, according to a consensus of analysts’ forecasts provided by the company.

General merchandise sales fell 1.5% in the first quarter.

Pre-tax profit is also forecast to have fallen 3.7%, according to consensus, to £252m. This would be the fourth such profit fall in a row.



No pressure, Mr Bolland

Forecasts of continued sales erosion will pile pressure on Marks’s CEO, Marc Bolland, who has been in charge since 2010.

He has overseen spending of more than £2.3bn over the last few years aimed at correcting decades of under-investment and driven the redesign of products and stores.

The new clothing team he set up in 2012 has so far failed to deliver a sustained increase in sales and for the first time, it appears M&S has earned less in the year to the end of March than its arch rival Next.

Turning the pressure up a notch further, Primark looks to have generated more sales than M&S’s general merchandise division – which includes clothing and home wares – and could even surpass M&S’s entire revenues for next year, if market forecasts for Primark’s full-year 2015 revenues as high as £5.5bn are correct.

M&S is forecast to generate group sales of £4.1bn over the same period.

For the current full year, Primark’s underlying operating margin increased to 12% from 13.4% in the prior year.

M&S’s pre-tax margin was 5.6% in the full-year to March 2014, with an operating margin of 6.7%.

We already know Marks’s clothing sales slipped 0.4% in the six months to 3 August, judging by data from retail monitoring firm Kantar Worldpanel.

M&S share of the market was down to 10.4%, 0.5% percentage points less than a year ago, Kantar said.



Food sales may fortify

Ironically, expected continued weakness in Marks’s non-food business, will sharpen the focus on its food business, which looked to have faced-off the severe challenges facing the grocery sector relatively well, until now at least.

M&S’s food business constitutes more than 50% of its group sales and the consensus forecast suggests a likely rise of 0.2% for the year, on a like-for-like basis, in a grocery industry growing at its slowest pace for 20 years, according to sector watchers like Kantar.


M&S set to trade between 380p-388p

M&S shares, like those of its grocery retailing rivals have in recent months, retreated beneath their long-term moving averages, as the sector’s fortunes have darkened.

The chart for Marks & Spencer Daily Funded Trade in City Index shows a similar softening.

In the event that tomorrow’s results are as lacklustre as forecast, there could be scope in the short-to-medium term for the trade to revisit mid-October lows, suggesting levels between 383p to 388p.



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