Marks & Spencer Weighed Down by Legacy of Missed Targets

Since arriving at Marks & Spencer Group Plc amid a fanfare four years ago, Marc Bolland has fallen short of his targets.

In his first year as chief executive officer, Bolland set a goal for sales of as much as 12.5 billion pounds ($21 billion) in the financial year through March 2014, a target he later cut to as much as 11.5 billion pounds. Today, the U.K.’s biggest clothing retailer reported revenue of 10.3 billion pounds.

Profitability has also disappointed the forecast of the man described by his predecessor Stuart Rose as “the very best” person for the job when he joined in 2010. A year ago, M&S targeted growth in gross margins of as much as 0.5 percentage point in general merchandise, a division that mostly comprises clothing. Instead, it reported a contraction of 1.1 percentage points, citing increased costs of discounting.

Past failings to meet targets meant the company’s latest forecast of a recovery in margins this year and improving clothing sales fell mostly on deaf ears, with investors sending the stock down as much as 3.8 percent amid concern that the London-based retailer may again struggle to meet its promises. !

“The key question is whether M&S can actually deliver on this guidance or whether pressure from competition and higher promotions will once again cause the company to fall short of its margin goals,” Jamie Merriman, an analyst at Sanford C. Bernstein in London, said in a note to clients.

Increased Efficiency

The gross margin in the general-merchandise unit will widen by about 1 percentage point this year, particularly in the second half, amid increased efficiency and savings in product purchasing, M&S said today. The margin in the food division will increase by as much as 0.3 percentage point, it forecast.

“We are skeptical about taking these projections at face value until results are visible,” Christodoulos Chaviaras, an analyst at Barclays Plc, said in a note.

Chief Financial Officer Alan Stewart sought to reassure investors that margin targets for this year will be met.

“We didn’t meet the guidance last year because of the markdowns,” Stewart said at a press conference. “This time 75 percent of the margin improvement will come from sourcing benefits. Clearly we have more control over sourcing.”

Bolland, the former CEO of William Morrison Supermarkets Plc, has spent 2.3 billion pounds over the past three years on improving stores, revamping the women’s wear offer and reinventing the retailer’s online business -- so far without translation into higher profit. A new customer website introduced this year will take four-to-six months to “settle in,” which will have “some impact” on the performance of the general-merchandise unit in the first quarter, he said today.

‘Behind Plan’

The retailer’s performance is “not yet satisfactory,” Bolland said, adding that staff won’t get a bonus this year.

While the international division and food sales are showing strength, “on general merchandise we’re behind plan, not just sales, but margin,” he said. “There is more to be done.”

Marks & Spencer shares fell 1.4 percent to 444.8 pence as of 2:25 p.m. in London. That valued the retailer at 7.2 billion pounds, about a third less than competitor Next Plc, whose market capitalization surpassed M&S for the first time in 2012.

Marks & Spencer also trails Next in terms of profit after today reporting its third straight decline in annual earnings. Underlying pretax profit fell 3.9 percent to 623 million pounds in the year ended March 29. Next made 695 million pounds on that basis in the year through January, even though its sales are less than half those of its main competitor.

Clothing Improvement

“My concern is that product -- in clothing and women’s wear in particular -- is still not right,” Neil Saunders, an analyst at researcher Conlumino, said of M&S by e-mail.

Bolland insisted today that an improvement in clothing sales has continued. The apparel unit had its best performance in three years in the fourth quarter, though with more special offers and deeper discounts than anticipated, Bolland and Stewart said last month.

Executives are now pinning their hopes on a new autumn/ winter fashion collection that was unveiled last week. The second such range to be produced under style director Belinda Earl came with assurances from the retailer that it had learned from last year’s mistakes, when an iconic pink coat, which was only available in selected stores, sold out within weeks.

Key fashion items will be more widely available across the stores, with at least 50 percent of the garments shown at press briefings being in all outlets. M&S also obtained 30 percent more of the coats, dresses, skirts and cardigans from suppliers.

Cash Returns?

“We believe that the emphasis on quality and style is winning back custom,” Eithne O’Leary, an analyst at Oriel Securities in London, said by e-mail.

Marks & Spencer today cited potential for excess cash to be handed back to shareholders “on a regular basis” amid improving cash flow. Investors have been pushing for Bolland to at least emulate Next’s policy of returning cash.

The retailer is reducing capital spending and said today it is targeting net debt of 1.5 times to 2 times earnings before interest, tax, depreciation and amortization. The ratio is currently at the top of that range, meaning that cash returns are “not imminent,” analysts at Morgan Stanley said in a note.

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