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By
Reuters
Published
May 25, 2016
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New boss warns on profit as turns to "Mrs M&S" to revive clothing

By
Reuters
Published
May 25, 2016

A warning from Marks & Spencer's new boss of a short-term profit hit from efforts to turn around its clothing business by cutting prices and improving ranges knocked its shares on Wednesday.



Steve Rowe, a 26-year M&S veteran, replaced Marc Bolland as CEO of the 132-year-old British retailer last month with a remit to revive clothing and homeware, which contributes about 60 percent of profit but has seen five years of falling sales.

Rowe said he would focus on the retailer's most loyal customer, a 50-year-old woman he described as "Mrs M&S", who had been neglected in the pursuit of younger, more fashion-conscious shoppers.

"We're committed to celebrating and cherishing her and we're listening to her," he said.

His warning that it would take time for customers to notice improvements and return to M&S stores to buy products other than its successful food ranges, combined with the impact on its margin forecast worried investors, who endured several turnaround false dawns during Bolland's six years in charge.

M&S shares, already down a quarter this year, fell up to a further 10 percent.

M&S, which has long been Britain's biggest clothing retailer, has seen its market share eroded by rivals like Next and a push from supermarkets into clothing, while younger shoppers favour Primark and H&M's cheap prices and more fashionable clothes or online stores like ASOS .

M&S's share of Britain's clothing and footwear market fell from 13.9 percent in 1997 to 10.3 percent in 2014-15.

Rowe's plan is to drive improvements in the quality, fit and availability of M&S's ranges, while lowering prices and reducing the proportion of sales on promotion.

Prices will be cut by about 10 percent on one third of summer ranges, while the number of product lines will be cut by 10 percent. Customer service will be improved with more shop floor staff, which requires investment.

That and the combination of difficult trading conditions, both in the UK and overseas "will have an adverse effect on profit in the short term," said Rowe.

Some analysts were sceptical. "There is no easy fix for the general merchandise business," said Freddie George at broker Cantor Fitzgerald, who has a "sell" rating on M&S.

GIVE HIM TIME

However, one of M&S's top 10 investors, who spoke on the condition of anonymity, said it was supportive of Rowe's strategy and willing to give him time.

Richard Marwood, manager of the UK Growth Fund at Royal London Asset Management, another M&S investor, highlighted its appealing dividend yield.

"If some of these plans can bear fruit and drive earnings growth from here, that could be quite an attractive combination in terms of total shareholder return."

Rowe declined to put a time frame on recovery but noted: "If everyone of our (32 million) customers ... shopped at M&S just one more time a year, this would put an additional half a billion pounds into our tills."

He forecast sales trends this year would be similar to last, when like-for-like sales in clothing and homeware fell 2.9 percent.

Lower prices, and currency pressure, would also limit an improvement in the gross margin to 50-100 basis points. This was below expectations and further unnerved the market after Bolland had made big strides in boosting margins.

Analysts at UBS said the guidance implied a 10 percent downgrade to consensus profit forecasts, which prior to Wednesday's update were 710 and 744 million pounds for 2016-17 and 2017-18 respectively.

M&S's underlying pretax profit rose 4.3 percent to 689.6 million pounds in 2015-16, beating analysts' forecasts, on revenue up 2.4 percent to 10.6 billion pounds.

Rowe said M&S's other big strategic issues, including the size of its UK store estate and international plans, would be addressed in the autumn.

$1 = 0.6843 pounds

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