Marks & Spencer Shares Drop on Full-Year Margin Forecast

Marks & Spencer Group Plc shares declined after the U.K.’s largest apparel retailer said discounting in the fourth quarter hurt profitability.

The shares dropped 3.1 percent after the London-based company said the full-year gross margin at its U.K. business probably fell by 0.2 percentage point following a drop in the second half in the general-merchandise segment amid a “highly promotional market.”

Chief Executive Officer Marc Bolland and Chief Financial Officer Alan Stewart told reporters today that while the company’s clothing unit had its best performance in three years as demand for women’s fashions picked up, it had to provide more special offers than planned and also offered deeper discounts than anticipated in its spring clearance sale.

“The morning market was initially encouraged by the improvement in women’s wear,” said Clive Black, an analyst at Shore Capital in Liverpool. “However, now there is concern on the impact of profitability with all the markdowns and promotions.”

The shares declined 14 pence to 442 pence at the close after rising as much as 3.3 percent in the first hours of trading.

Improving Style

Bolland has pledged to revamp clothing sales at the retailer, investing in improving its style and online offerings. The company’s main customers, women of ages 50 to 70, still deem Marks & Spencer’s too frumpy and expensive, according to a focus group, Jamie Merriman, an analyst at Sanford C. Bernstein, said last month.

Clothing revenue in the fourth quarter ended March 29 rose 1.3 percent at U.K. outlets, helping group sales rise 1.9 percent, excluding value-added tax and currency shifts, the London-based company said today in a statement. At stores open at least a year, clothing sales rose 0.6 percent.

“People are buying more into better and best” products, and female customers are “trading into better-priced dresses,” Bolland told journalists on a conference call. “Even the feedback we get with promotions shows that people are trading up” to higher-quality items.

Before today’s announcement, analysts estimated full-year profit of 615 million pounds to 620 million pounds, Stewart said. He declined to comment whether how he now views those predictions. That range compares with the 622.6 million-pound ($1 billion) average of 22 pretax-profit analyst estimates compiled by Bloomberg.

‘Breathing Space’

The sales figures “will bring both relief and a much needed breathing space for the top team at M&S and will hopefully give them the confidence to move forward with more radical reforms of the fashion business which, in our view, are still needed,” said Neil Saunders, managing director at researcher Conlumino in London. Even so, “M&S has underperformed the market during this period and, as such, has continued to cede share.”

U.K. like-for-like revenue declined 0.2 percent in the quarter as general merchandise was held back because a late Easter, which this year takes place in April, reducing home-ware sales. Food revenue on that basis advanced 0.1 percent, topping the median estimate for no change. The previous fiscal-year margin was 40.9 percent of sales.

“The M&S statement looks OK, and is definitely a little better than some had feared,” said Richard Marwood, who helps oversee more than $700 billion in assets at Axa Investment Managers, including Marks & Spencer shares.

Bolland is counting on the company’s new website and advertising campaigns featuring celebrities including actress Emma Thompson and singer Rita Ora dressed in the new spring/summer collection to boost sales.

Phased Improvement

The CEO declined to comment on whether the quarter marked a turning point, as “we always said it’s a step-by-step improvement.”

M&S plans to open 250 stores internationally over three years, including food outlets in France and the addition of a local partner in China. The goal is to raise profit outside the U.K. by 40 percent over the next three years, Bolland said last week.

Online revenue jumped 13 percent in the quarter, while sales abroad, excluding value-added tax and currency effects, increased 4.7 percent, M&S said today. The full-year gross margin for food probably was “slightly ahead’ of forecasts.

The retailer is scheduled to publish fiscal 2014 earnings figures on May 20.

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