Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Down-to-earth M&S chief executive Steve Rowe has delivered a commonsense recipe for reviving the high street stalwart.

He's got some work to do -- pre-tax profit after one-time losses fell 18.5 percent to 488.8 million pounds ($715.7 million) in the 53 weeks to Apr. 2, he said Wednesday. 

Flatlining
M&S's underlying profits have stalled over the past five years as profitable clothing sales have fallen
Source: Bloomberg

Putting more of the benefits the company has reaped from revamping its supply chain into cutting clothing prices and improving quality is long overdue.

Improving the style -- think a nod to fashion rather than catwalk creations -- fit and availability of clothing is also sensible, as is putting more staff in stores.

But Rowe, who started out on M&S's shop floor, has warned that the measures to improve clothing will hit profits in the short term. Predecessor Marc Bolland prioritized returns to shareholders over products that customers wanted to buy, and restoring the balance is badly needed.

That won’t come cheap. Veteran analyst Tony Shiret at Haitong Securities expects consensus forecasts for underlying pre-tax profit this year to come down from just over 700 million pounds to about 625 million pounds.

The shares fell 9 percent -- the most since 2008, when M&S was battling the twin challenges of the financial crisis and unpopular changes to its corporate governance.  But this is a price worth paying to improve the profitable clothing business for the longer term. 

There were also some notable omissions in Wednesday's announcement. Rowe won't tackle the company's sprawling U.K. store base, which is large and has some outlets in the wrong locations. 

Andrea-m&s

M&S has about 300 stores selling both clothing and food, and a look at industry trends can give an idea of how much it may need to cut. In the U.K. about 20 percent of retailers' clothing sales are online, so applying that ratio to M&S implies a reduction of about 60 of its mainline stores.

Of course, if Rowe's turnaround strategy works, then this would negate the need for large-scale store closures. But that looks naïve, given the structural shift towards online shopping. No matter how good Rowe's recovery, it won't change the underlying trend.

Rowe's already taken an ax to top management and that had fueled hopes he would extend this to head office staff numbers, which have risen 25 percent over the past five years. He didn't make an announcement on head-office staffing count Wednesday, though will close its defined-benefit pensions plan to existing members. 

 

Heading Upwards
M&S's U.K. head office staff have increased over the past five years
Source: Company reports

He will come back to the U.K. store base, the international arm and staffing issues in the autumn.

With the sharp fall in the shares, M&S's forward price earnings ratio at 11.2 times is back below Next's 12.2. The differential had narrowed after Next's warnings on its outlook in recent months. And they're both lagging the 15.8 average in the next 12 months for Bloomberg Intelligence's European apparel peer group.

Lagging Again?
M&S's forward price earnings ratio is back below Next's even after Rowe announced revival strategy
Source: Bloomberg

 

For M&S, the lower valuation looks justified given the possibility of further costs from head-office staff cuts and actions on stores -- exiting leases can be expensive. While Rowe has taken down profit forecasts, the success of his turnaround plan, while the right thing to do, is by no means guaranteed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net