Marks & Spencer’s Bid to Woo Female Shoppers Vexes Investors

Updated on
  • Rowe’s plan a reversal from previous CEO’s emphasis on margins
  • M&S shares plummet 8.7%, the biggest drop in seven years

Marks & Spencer Group Plc’s effort to win back its core female clientele by cutting prices, de-cluttering aisles and hiring more in-store workers has alienated investors, who criticized the plan as short on ambition and detail.

The retailer’s shares fell the most in seven years Wednesday as investors panned Chief Executive Officer Steve Rowe’s plan to rejuvenate its moribund clothing business, which will hurt short-term profits and didn’t address possible store closures. His courtship of customers at the expense of investors deviates from the strategy of his predecessor, Marc Bolland, who focused on margins while employing investor-friendly tactics like share buybacks.

“Today’s reaction is understandable, given the short-term downgrades,” Richard Marwood, a senior fund manager at Royal London Asset Management, which owns M&S shares, said. Some investors had expected news about store closures, he said.

Describing the U.K. retailer’s mainstream customer as a 50-year-old British woman dubbed Mrs. M&S, Rowe told reporters that he plans to “cherish her and give her absolutely what she wants in terms of product, style and value. There are times when we’ve not paid enough attention to her.”

Analysts, who expected Rowe to pay more attention to them, found his plan lacking. M&S will reduce styles, cut prices on some items by more than 10 percent and dial back promotions. That will come at a cost, with gross margins forecast to widen at less than half the pace of last year’s 2.4 percentage-point expansion. Rowe also said a challenging retail market will weigh on profits.

‘Poor Combination’

“A major downward revision to consensus estimates and deferral of the results of the strategic review seems a poor combination,” Tony Shiret, an analyst at Haitong Securities, said in a note. There was a “lack of clarity on key strategic issues –- which we did not expect at this stage.” 

Analysts’ consensus estimate for pretax profit this year will drop by about 12 percent, Simon Bowler, an analyst at Exane BNP Paribas, said by e-mail.

For a Gadfly commentary piece on M&S, click here

Rowe’s predecessor Bolland, while failing to arrest the declines in clothing, delivered a 150 million-pound ($220 million) share buyback program last year and the first dividend increase since 2011. Margins in the division that includes apparel widened by 1.9 percentage points in 2015 as Bolland reduced costs and scaled back the capital spending that characterized the early part of his time in charge.

M&S cut its store staff too much over the last few years, Rowe said in a press conference at the company’s West London headquarters. 

Some of what Rowe announced simply followed on moves he’s already made, like his earlier decision to de-emphasize M&S’s half-dozen womenswear brands, which include Per Una. He had also already reduced prices on about 300 non-food items over the past three months.

Investors also didn’t like Rowe’s decision to wait until after the summer to address the company’s embattled international unit -- where profit plummeted 37 percent -- and the size and structure of its U.K. store portfolio. M&S has 914 U.K. locations, and internationally it operates 480 stores across 59 countries.

Rowe isn’t the first CEO of an iconic retailer to try to reconnect with shoppers by cutting through clutter. Five years ago, Wal-Mart Stores Inc. removed hundreds of products from its shelves to make shopping its cavernous stores easier, but the plan backfired as customers complained that some of their favorite items were no longer stocked.

Rowe tried to please investors by boosting M&S’s dividend to 18.7 pence this year, although that fell below the Bloomberg forecast of 19.3 pence. It’s also delivering a special dividend of 4.6 pence per share.

“There are some positives,” HSBC analyst Paul Rossington said in a note. Marwood, the investor, put a positive spin on the share reaction: “The better buying opportunities are typically when enthusiasm is low.”

(Updates with investor comment in third paragraph.)
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