A Sigh of Relief at Marks & Sparks

Vandevelde's restructuring has cash registers ringing again

When Luc Vandevelde took over Marks & Spencer PLC (MASPY ), one of Britain's most cherished yet troubled companies, in February, 2000, he promised to quit if he didn't meet profit goals within two years. Industry insiders whispered that the former Kraft Foods Inc. executive was setting himself up for failure with such a tight turnaround schedule.

Well, Vandevelde gets to keep his job. Shares of Marks & Sparks, as the 118-year-old midmarket department store chain is affectionately known, have nearly doubled in value in the past 12 months. Although London Stock Exchange rules prevent M&S from commenting until it releases financial results on Jan. 16, analysts estimate that the group's same-store sales advanced as much as 6% in the third quarter, bolstered by the biggest holiday shopping spree Britain's retailers have seen in five years. "They're now on a genuine recovery track," says analyst John Baillie of SG Securities in London.

To fix M&S, the 50-year-old Belgian executive has ushered in a younger and hipper management team, replacing all of its senior managers as well as board members, whose long tenure incited unfavorable comparisons to the British civil service. He also has slashed nearly 4,000 jobs, shuttered 38 money-losing stores in Europe, and spun off poor performers like clothing retailer Brooks Brothers and Kings Super Markets Inc. His decision to sever longstanding ties with British suppliers and shift three-quarters of all apparel production overseas has boosted clothing margins. For the year ending in March, 2002, pretax profits should rise more than 35%, to $821 million, on sales of $1.2 billion, according to Goldman, Sachs & Co. analyst Keith Wills.

Not bad for a company that only a few years ago looked like a retail has-been. In Britain, M&S's market share has slipped to 12% from 15% in 1998. Although still No. 1 at home, M&S has lost ground to style-conscious rivals such as Sweden's H&M Hennes & Mauritz (HMRZF ), Spain's Zara, and midmarket British retailers Debenhams and Next.

Overexpansion and a bungled foreign foray have also hurt. In the 1990s, M&S increased the size of its average British store by more than a third. Bad move: It had to offer more products just to fill the extra space. "They moved into areas such as mobile phones and jewelry, where they were just a me-too player," says Wills. An ambitious move to establish a beachhead in Europe, where the chain opened 40 stores in France, Germany, Spain, and Belgium, failed because M&S was just another bland store and relatively unknown.

In hindsight, M&S might have fared better on the Continent had it concentrated on one of its two pillars of strength: lingerie and food. Underwear is M&S's best-selling product in Britain, commanding more than 30% of the market, and could likely be exported in the future through small boutiques, says Wills. Food is another growth area: Sales of M&S's high-quality, ready-to-eat meals account for more than 40% of sales, despite competition from supermarket chains Tesco PLC (TSCDY ) and J Sainsbury PLC (JSNSF ). Analysts say M&S could boost market share by opening small food shops outside big cities.

Now a humbled Marks & Sparks is returning to its roots. Vandevelde has spent $115 million in the past year to modernize one-third of his 290 stores in Britain. He also has hired top talent to update the chain's frumpy image, including George Davies, the man behind the successful George line of clothing at Wal-Mart Stores Inc.'s British subsidiary, ASDA Group Ltd. Sales of Per Una, Davies' trendy line of women's wear for M&S, have been so strong since its September launch that the retailer had to delay rolling out the brand in all of its stores. The new collections have helped stem a decline in clothing sales. These rose 0.8% in the quarter ending Sept. 30--an improvement from a year ago, when they were down 9.1%. Merrill Lynch & Co. figures every percentage point in extra sales adds $43 million to pretax profits.

Vandevelde is also shaking up company culture. Buying decisions, once dictated by the head office, are now set at individual stores and based on local tastes. "The company has become much more entrepreneurial," says Richard Hyman, chairman of London retail consultants Verdict Research. With his job no longer in doubt, Vandevelde now must make sure that M&S keeps its spark.

By Kerry Capell in London

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