Marks & Sparks Isn't Throwing Off Any

A profit plunge throws cold water on the retailer's global push

Aside from British Broadcasting Corp. and the monarchy, there's probably no other institution as much a part of British daily life as Marks & Spencer. The $13.7 billion retailer sells one out of four men's suits bought in the country. Former Prime Minister Margaret Thatcher buys her underclothes there, along with 40% of British women. Chances are nearly everyone on a British street is wearing something from Marks & Sparks, as it is affectionately nicknamed.

But venerable M&S is coming under fire. On Nov. 3, the retailer stunned investors by announcing a 23% drop in midyear profits. The bad news sent its stock skidding to a three-year low, prompted analysts to slash their full-year earnings estimates, and rocked London's stock market. The earnings slump also casts doubt on M&S's quest to become a global retailer and raises questions about the future of chief executive Sir Richard Greenbury.

SLOW UPTAKE. M&S is suffering from bad timing. It has been hit with poor sales in Britain, North America, Continental Europe, and Asia just as it embarks on the most ambitious expansion push in its 114-year history--adding 3 million square feet of new selling space to its 683 existing stores and opening new sites. The sales slump partly reflects mistakes in merchandising, inventory control, and pricing. But analysts say M&S was slower to react to a tough environment than many rivals. And flagging economic growth worldwide means things will get even tougher for M&S.

Greenbury passionately defends M&S's performance. He blames a downturn in consumer confidence and a strong pound for most of its woes. But investors and analysts don't buy it. "The majority of M&S's problems have to do with M&S, not with the retail environment," insists Nathan Cockrell, an analyst at BT Alex Brown Inc. in London. M&S shares have underperformed those of other British retailers by 25% over the past year, and its market share has been slipping.

The biggest hit to profits came from M&S's core business: its 289 stores in Britain, where operating profits plunged 24%, to $454 million, for the six months ended on Sept. 26. Although the rainy summer hurt clothing sales at many retailers, M&S exacerbated its problems by rolling out a range of dull clothing that didn't tempt buyers. Worse, when it realized it was likely to be stuck with too much stock, it wasn't able to cut back quickly enough on inventory coming from its suppliers, analysts say. Marks has slashed prices on $1 billion in goods in an "Autumn Values" campaign, the biggest off-season sale in its history.

GROWTH HIT. Other British retailers are also running fall sales. But few of M&S's rivals are expanding as fast. Last year, the company paid $321 million in cash to buy 19 stores from Littlewoods, a rival department-store chain. Now, it has slashed its budget for adding nearly a quarter more retail space by 2000 from $3.7 billion to $3.2 billion.

Such problems at home could derail M&S's critical global initiative. With 85% of sales and 94% of profits coming from Britain, the company needs to diversify. "Overseas expansion is absolutely crucial to us long-term," says Greenbury. Yet to cut costs, M&S is slowing its aggressive expansion plans on the Continent. It had hoped to have 60 stores in Continental Europe by 2000. Now, it's aiming for 44. Likewise, the company is reviewing the growth plans of its North American stores, which include the revived Brooks Brothers chain and the upscale Kings Super Markets Inc., and slowing expansion in Asia.

Amid the missteps, scrutiny of Greenbury has intensified. The 62-year-old executive, who plans to retire in 2001, is under pressure from some institutional investors to name a successor and divide his roles as chairman and CEO. There's even talk of a boardroom power struggle in which Peter Salsbury, one of three joint managing directors who works for Greenbury, might unseat Deputy Chairman J. Keith Oates as heir apparent. If sales over the crucial holiday season don't show more sparkle, Greenbury's 10-year reign at M&S could end ignobly.

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