Marks & Spencer Sales and Profitability Surprise as Bolland Makes His Mark

Marks & Spencer Group Plc (MKS), the U.K.’s largest clothing retailer, reported sales that beat estimates and forecast improved profitability as Chief Executive Officer Marc Bolland starts to put his stamp on the business.

The gross margin in fiscal 2012 will be as much as 25 basis points higher than last year, helped by fewer markdowns on clothing and reduced food waste, the London-based retailer said today. A 3.9 percent drop in same-store sales of non-food items in the 13 weeks ended April 2 was better than the 6 percent median estimate of 15 analysts surveyed by Bloomberg.

The shares rose the most in about 11 months. Bolland, who took over less than a year ago, has boosted senior management with the addition of former Tesco Plc and Inditex SA executives, increased marketing on clothing brands and is adding 1,000 new food lines such as gluten-free sandwiches to stoke sales.

“The margin guidance is stronger than we had anticipated,” John Stevenson, an analyst at Peel Hunt in London, said in a note. He raised his recommendation on the shares to “hold” from “sell.”

Marks shares rose as much as 20.6 pence, or 6.1 percent, to 360.8 pence, the steepest intraday advance since May 10, 2010. The stock was up 19.8 pence at 360 pence at 12:30 p.m.

‘No March Blip’

The retailer expects business conditions to become “increasingly challenging” this year because of a squeeze on consumer incomes and rising commodity prices. Still, consumer confidence didn’t worsen in March as people seek out quality and “buy once, buy well,” Bolland said on a conference call.

“We have seen no March blip, or dip,” the CEO said. “People want to celebrate events more than ever. Because of maybe a bit of negative news, they get a bit tired of that, and we’ve seen positive sales during events.”

The drop in the general merchandise unit’s same-store sales was caused by the quarter starting and ending five days later than in the previous year, meaning that the first days of the post-Christmas clearance sale weren’t included, Marks & Spencer said. Adjusting for this, sales rose 0.7 percent, it said.

“M&S performed better than feared in a tough backdrop,” Matthew McEachran, an analyst at Singer Capital Markets, said in a note. The retailer should now meet profit estimates for fiscal 2011, he said. McEachran has a “fair value” rating on M&S.

Sales of food at stores open at least a year gained 3.4 percent, beating the 1 percent median analyst estimate. Growth was driven by promotional events like Valentine’s Day, where Marks sold 500,000 “Dine In” dinner promotions, Bolland said.

Increased Promotions

Promotional levels across the food-retail industry are higher than before and likely to remain so, Bolland said. Promotions at Marks & Spencer are “a number of percentage” points lower than the industry average of 40 percent, he said.

The retailer will improve gross margins through better sourcing, a reduction in food waste and fewer markdowns than last year, when snow deterred shoppers, Finance Director Alan Stewart said on the call. Entry-level price points will remain the same, such as a 12.50-pound ($20.43) men’s polo shirt and 9.50-pound women’s fleece jackets.

“Gross-margin guidance of flat to 25 basis points would be a fine result given the additional cost pressures,” said John Guy, an analyst at Royal Bank of Scotland Group Plc with a “hold” rating on the shares.

Operating costs this year will be about 5 percent higher, while the company increases its square footage by 2 percent in the U.K. and 10 percent abroad, Marks & Spencer said.

Bolland said last week he was planning to re-enter France after a decade-long hiatus by opening a department store on Paris’s Champs-Elysees, starting a French-language website, and planning Simply Food outlets in and around the capital city.

Photographer: Chris Ratcliffe/Bloomberg

Mens coats are seen on rack at a Marks & Spencer Group Plc store in London. Close

Mens coats are seen on rack at a Marks & Spencer Group Plc store in London.

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Photographer: Chris Ratcliffe/Bloomberg

Mens coats are seen on rack at a Marks & Spencer Group Plc store in London.

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

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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