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.

 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.