M&S First-Half Net Tops Estimates as Sales Decline Eases

Marks & Spencer Group Plc, (MKS) the U.K.’s largest clothing retailer, reported first-half earnings that beat estimates and forecast an increase in profitability for the year as it offers fewer promotions.

Gross margins will be “towards the top end” of a range from unchanged to a 0.25 percentage-point increase, the London- based company said today as it reported a 5.8 percent drop in underlying pretax profit and said clothing sales declined at a more moderate pace in the second quarter.

The retailer is giving fewer discounts than last year and has increased supplies of popular advertised lines such as military coats, Chief Executive Officer Marc Bolland said on a conference call. M&S is struggling to keep pace with competitors such as Primark, the budget fashion chain owned by Associated British Foods Plc, which today reported a 15 percent increase in full-year revenue.

“General merchandise did show signs of a big pickup, but autumn-winter remains pretty key,” John Stevenson, an analyst at Peel Hunt in London, said by phone. “They made some basic errors with ranges, so we can gain comfort” from the rebound in sales, said Stevenson, who has a hold recommendation on M&S.

After falling 6.8 percent in the first quarter, same-store sales at the general-merchandise division eased 1.8 percent in the second three months, the retailer said. The gross margin in the U.K. widened 0.3 percentage point.

Share Performance

Marks & Spencer shares rose as much as 2.6 percent in London trading and were up 2.4 percent at 397.4 pence at 3:31 p.m. The stock has gained 28 percent this year.

Underlying pretax profit rose to 296.8 million pounds ($474 million) in the six months to Sept. 29, beating the 280 million- pound median estimate of 13 analysts surveyed by Bloomberg.

The retailer ordered five times as much stock of advertised lines compared to last year, and sold three times more of those items in the first four weeks of the season, Bolland said.

“We believe we’ve got good quality in stores and some excellent backing of trends out there,” such as baroque lace skirts, the CEO said on the call.

Still, the retailer needs to increase its focus on style, trends and quality to improve its general merchandise performance, Bolland told journalists.

Marks & Spencer intends to offer more fashionable clothing while keeping a high quality level to distinguish its offerings from those at competitors such as Inditex SA’s (ITX) Zara chain, the CEO said. “What we’re seeing is completely different, we’d like to be on-trend with a great quality to it, and that’s a different position.

Style Improvement

“Have we been backing the trends sufficiently in the past? Probably not,” the CEO said. “We can do it better.”

Bolland said a successful Autograph-brand dress with military styling, offered at 55 pounds, is an example of the way forward.

“We’re not fast-fashion but we are certainly following fashion trends,” the executive said. “Some of the fast-fashion retailers bring out things against their quality that is also nearly disposable clothing and that’s what we don’t want to do.”

Marks & Spencer said sales growth at its food division accelerated to 1.6 percent in the second quarter from 0.6 percent in the first three months, outperforming the market.

Consumer Caution

Recent business has been “volatile” and M&S said it’s “cautious” about the outlook for the rest of the year. “People are a bit more wary now about payday,” Bolland said.

The CEO is 18 months into a three-year turnaround plan focusing on turning Marks & Spencer into an international, multichannel retailer. Concept stores with new beauty ranges, enhanced signage and online browse-and-order points have shown a 2.6 percent in increase in sales, the company said today.

Investors are “very, very supportive of us,” Finance Director Alan Stewart said on the call.

“The very clear message they give us is that they view their investment as an investment that they value for the long term, don’t be distracted from short-term market issues, don’t be distracted from your strategy and don’t be diverted,” Stewart said.

Marks & Spencer said yesterday that Frances Russell, the former director for lingerie and beauty, has been promoted to director of womenswear, while Victoria’s Secret Chief Creative Officer Janie Schaffer will join early next year as director of lingerie and beauty. The effect of the changes will be noticed when autumn and winter collections are introduced to stores in July next year, Bolland said.

The retailer also ruled out an online food offer as its typical basket size of a 20-pound top-up shop is not economical to deliver to home compared with supermarket chains that cater more to weekly shopping with 100-pound basket sizes. The CEO said M&S released 1,000 new food lines in the first half, and that the products are best seen in the store rather than online. A further 300 products are planned in the Christmas season.

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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