Marks and Spencers decisive action faces Christmas test

It won’t be just another seasonal let down if signs of a rebound in clothing fade

Investors have been served a glimpse of Marks & Spencer’s former charms, as a tightly controlled slice of its embattled clothing division grew above the market average. A full-price and planned promotional sales rise of 2.7% is something for shareholders to hold on to as the rest of M&S just about manages to contain deterioration within broadly expected limits. The need for a C&H turnaround remains critical if M&S is ever to thrive again, so at one point on Wednesday, a sliver of surprised relief propelled the stock almost 8% higher. But the sheer scale of the task ahead before broad growth can be rekindled later faded the stock move to a more sober 2% rise.

Still, an ‘investor morning’ last month enabled management to signal the likely weak points in the first half, chiefly that the Clothing & Home turnaround was running some 18 months behind schedule. At the same time, signs of continued resilience in food were also corroborated. The net effect is that most of the additional negative news in Wednesday’s report has largely been priced. As such a smattering of positives can stimulate the battered shares.

Key H1 performance points

• 1H food comparable sales +0.9%; company-compiled estimate +0.3%
• Clothing & Home comparable sales -5.5%; company-compiled estimate -4.3%.
• 1H group like-for-like U.K. sales -1.5%
• 1H adjusted pre-tax profit £176.5m; M&S-compiled estimate £176.0m
• 1H revenue £4.86bn, -2.1%, vs. £4.85bn consensus compiled by Bloomberg
• M&S.com +0.2%, “less than planned”

As things stand then, the C&H full-price/planned promo win was one of the few significant positive surprises. CEO Steve Rowe has made clear that the rest of Marks & Spencer will take a while to catch up: “There’s a lot to do, and it will take some time.” Underscoring that assessment, despite some improvement in October, C&H still saw quarterly like-for-like sales worsen to -5.7% in Q2 vs. -Q1’s -5.2%. The contrast with strong reports from Next and Primark in that month suggests continued market share loss. M&S food LFLs improved in the most recent quarter to +1.4% after +0.4% in Q1.

To right the ship Rowe’s store closure programme has continued apace, further operating cost moves are afoot after £75m of savings were delivered in H1, and more granular efforts, (data science and personalisation and more) are being deployed at M&S.com. Elsewhere, “decisive action” has been taken to improve weak availability which has been core to dire clothing sales, with “dramatic” results in some areas.

The proof that these efforts have been successful will be visible in the third-quarter’s pudding. An all-important Christmas update is scheduled on 9^th January. Investors will need to see meaningful progress on a range of targets, including the open-ended goal of achieving one third of UK sales online. As well, M&S guides that the 2019/20 gross margin will reduce by 25-75 basis points. Limiting the compression to that range may turn out to be the toughest near-term challenge. The risk of reactive price cuts tends to rise around the seasonal period, whilst arch-rival Next now has a better-established run of protecting full-price sales.

Overall, despite a strengthening food recovery, the risk of further Marks & Spencer underperformance into the year end is difficult to shrug off. For that reason, Marks & Spencer stock looks far likelier to extend declines into January than to build a sustainable floor on Wednesday’s uptick. The shares are down about 20% in 2019