Marks & Spencer investors temper optimism

Marks & Spencer investors were ready for any sign the institution is beginning to stabilise and these have duly appeared, though they're only relative

Summary

Marks & Spencer investors were ready for signs the institution is beginning to stabilise and they duly appeared in Clothing & Home.

C&H surprise

The market seized on the absence of a widely feared dividend reduction and the fact that the outlook for the retailer’s Clothing & Home gross margin would at worst be unchanged, but could rise 50 basis points. This was a positive surprise, even if from our reckoning, most investors had no firm forecast for C&H’s gross margin for the year, given its volatile recent performance. Still, Marks & Spencer confidence on margins in the department are the key takeaway from its full-year report. The 100 basis point improvement implied by the upper end of C&H margin guidance in the current year and the 0.5% expansion in 17/18, would be equivalent to another c.£22m in gross profit. Hence, income from the department could help decide whether group profit stabilizes near last year’s level or fall for a third consecutive year.

Overall retreat continues

M&S retreated on almost every other key front over the final quarter of the year and annually. The underlying decline in food sales worsened in Q4 to 0.6% year-on-year after slipping 0.4% in the third quarter, dragged by “poor” day-to-day performance and “progressive decline in competitiveness”, all leading to a bigger than expected 1.4% margin fall for the year. That turnover increased 3.9% points to M&S’s attempts to get ahead of competition that it described as “intense”. However, the impression that these were remediation efforts in lieu of sustainable wins was clear.

Clothing & Home encourages

Broad clothing and home trends were still sickly too. Even with the gross margin advance, revenues slipped 1.4% and 1.9% on a like-for-like basis, as M&S weaned itself off clearance sales and due to a weather-challenged second half of the year. The same-store contraction in C&H also deteriorated in Q4 to -3.1% from -2.3% in the third quarter. Still at the margin, signs were more encouraging in Clothing & Home in more ways than one. On top of the firmer gross margin, partly driven by M&S seeing greater liberty to remove space in C&H than in Food, full-price sales were even, whilst key lines like Childrenswear, Bras and Footwear outperformed. Additionally, having recognised the online arena as crucial for C&H going forward, the group saw an acceleration in M&S.com underlying sales from paltry growth (for the web) of 2.9% in Q3 to 8% in Q4.

Relief rally fades

Even so, overall, M&S’s annual results confirm that most of the work to right the institution remains ahead. In turn, that suggests Wednesday’s share price relief rally is unlikely to mark the end of a declining trend that has seen the stock shed 50% over three years, including a 3% loss so far in 2018. The group’s declaration that the dividend is likely to be safe throughout its transition period is a major positive, but questions about Marks’ ability to honour that pledge all the way through to the 2020s remain. Cash flow growth continued to slow over the year under the weight of rising working capital needs linked to M&S’s transition and falling profit, even with capex on plan. The stock had reduced its gain to a 1.8% rise on the day at the time of writing as shareholders tempered optimism for the year ahead.


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