Nov. 4 (Bloomberg) -- Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, reported first-half profit that beat analysts’ estimates and said it made a “good start” to the third quarter, sending the shares up the most in seven months.

Net income was 224.3 million pounds ($369.4 million) in the six months ended Sept. 26, compared with 223.2 million pounds a year earlier, the London-based company said today. That exceeded the 201 million-pound median estimate of 12 analysts surveyed by Bloomberg. Per-share earnings were unchanged at 14.2 pence.

Competitor Next Plc also said today that third-quarter sales were better than the company expected. U.K. consumer confidence held at the highest level in 1 1/2 years in September, according to figures released today by the Nationwide Building Society. Marks & Spencer said it increased its share of the so-called value clothing market by 0.1 percentage point to 10.1 percent as the retailer aimed to match competitors’ prices.

“It’s a big positive surprise,” Nick Bubb, an analyst at Pali International Ltd., said of Marks & Spencer’s figures. Estimates of full-year profit are likely to increase today, he said. Bubb has a ‘sell’ recommendation on the shares.

M&S gained as much as 28.9 pence, or 8.5 percent, to 369.9 pence in London trading and was at 361.7 pence as of 10:26 a.m. local time. The stock has gained 69 percent this year.

‘Good Start’

“We have had a good start to the third quarter,” Executive Chairman Stuart Rose said in the statement. “The market remains competitive and we remain cautious about the outlook for Christmas and the year ahead.”

Rose told reporters he expects “a lot of competition” this Christmas, adding that the retailer will introduce 1,000 specialty holiday food lines to gain customers.

M&S said the gross margin in its general merchandise unit, which includes clothing, narrowed by 0.3 percentage points in the first half as improved product buying and inventory management helped offset increased sourcing costs caused by the weakness of sterling. Food gross margins narrowed by 0.65 percentage points as M&S cut prices and increased promotions.

The retailer didn’t change its forecast for the gross margin to narrow by 0.5 to 1 percentage points for the year, after increasing the target in September.

Finance Director Ian Dyson said he expects estimates of annual pretax profit to “edge up” beyond the 585 million-pound average. So-called adjusted pretax profit rose less than 1 percent to 298.3 million pounds in the first half.

“I think we’ve been through the worst of the downturn, we’ve seen some stability coming back,” Rose said.

Branded Products

Last month, M&S pitched its new 2020 strategy to investors, aimed at driving growth. The retailer has targeted 250 million pounds in cost savings, an enhanced international store opening plan and a larger online offering, including food.

M&S said today it will extend the sale of 400 branded grocery products across Britain after a regional trial proved successful. The initiative is aimed at retaining shoppers who are reluctant to buy only the retailer’s own food labels.

“It’s not about running out of ideas, it’s about running the brand along with consumer needs,” Rose said.

M&S said its share of the food retail market has fallen to 3.5 percent from 3.7 percent, citing Taylor Nelson Sofres data.

Profit at the 315-store international unit rose 21 percent to 65.9 million pounds, the company said, with seven new outlets in Europe, two in India and another 12 in Russia, Cyprus, Turkey, Qatar and the United Arab Emirates.

“It’s all much better than expected, overseas is better, the U.K. is better, gross margins are better,” Pali’s Bubb said.

The retailer stuck to its plan to reduce the first-half dividend, cutting the payout to 5.5 pence a share from 8.3 pence.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

Last Updated: November 4, 2009 05:27 EST