Marks & Spencer half year results: what the analysts say

Profits crashed 18% at Marks & Spencer (MKS) in the first half as its food margins were squeezed more than expected as the retailer absorbed inflation to remain competitive in the challenging grocery market.

Here’s how the analysts reacted:

City Index

Food fumble

”Faster than expected gross margin slippage in food was the biggest disappointment. There had been signs that M&S’s price and cost mix was well-calibrated to growing challenges facing grocery retailers amid input cost inflation. Instead, M&S has managed to take almost the full brunt of the hit in in the first half. Admittedly that was the cost of limiting retail price increases. But with steady like for like declines across both quarters against pockets of growth among competitors, it is clear M&S food market share was under pressure. We think these conditions were exacerbated by M&S’s response. The group has put its opening programme for the Simply Food format on hold. It now wants to “reposition our food offer for future growth”. The statement is puzzling. Investors had thought ‘repositioning’ was the aim of the Simply Food programme itself. Essentially M&S seems to be starting from scratch. That is a worry amid strengthened offers at Tesco and Morrisons. There is also scant further detail about the M&S’s new stance on food, apart from “sharpened prices”. Together with an aggressive promo response to the challenging environment, food moves began to blur the earlier impression of a tighter focus that emerged when Steve Rowe took control last year.”

Clothing & Home encouraging

”We get less of a sense of incongruity with Clothing and Home. To be sure, the 0.7% like for like decline there was poor, though no break from the norm. Additionally, the second quarter showed strong improvement to a dip of just 0.1% from -1.2% in Q1. Plus, the 5.3% uplift at full prices was notably better than arch rival Next, where stabilisation in October still left the year-to-date rate lower. Outperformance backs M&S’s view that C&H self-help is rendering “encouraging” results. Unfortunately, M&S online clothing and merchandise continues to lag. We were struck again by what appears to be poorly communicated sequencing of the group’s plans to improve digital C&H sales. We would like to think M&S had recognised some time ago that its general merchandise supply chain “needs to be faster and lower cost” and that “digital fulfilment capability” needs more investment to speed up growth. Official recognition had of course begun much earlier. But the date of a hard reset at C&H will be later than most investors were expecting.”

No kitchen-sink drama

”As kitchen sinking by British retails giant go, the one staged by M&S’s Steve Rowe has been a very gradual one. That pace has the advantage of reduced drama but it has possibly reduced shareholder visibility on execution. Nevertheless, the rapid resolution of lossmaking issues overseas was a clear success story. Together with headway on cost control and a cogent path to continued free cash flow growth, the next key inflection points for Marks are likelier to be improvements and not deteriorations. Indeed, we note Marks & Spencer has avoided the type of protracted discussions about its progressive dividend that other large consumer groups have wrestled with. True, underlying free cash flow growth was little more than flat in H1 and negative after the interim pay out, whilst net debt rose 5% to £2.03bn. However, excluding one-off effects from store closures and ending the defined benefit pension scheme, cash flow goals remain cogent. Low-hanging fruit from further cost initiatives also underpins the outlook for shareholder returns. Marks & Spencer’s margin for error remains limited, but little occurred in the first half that points to significant deterioration. And after the stock’s 6% decline this year, their forward rating of 11.7 times is not demanding.”

 

Begbies Traynor
“After reporting a significant drop in profits back in May, CEO Steve Rowe’s turnaround plan seems to be gathering pace, with the closure of under-performing stores and reduced promotional activity in the Group’s struggling clothing division starting to deliver results, albeit slowly.

“However the statement’s increased caution surrounding the prospects of its usually high-performing Food business, alongside the surprise resignation of CFO Helen Weir, will be troubling news to investors who previously saw Food as the jewel in M&S’s crown to crave stability from the company’s leadership team following a spate of high profile departures recently.

“Looking forward, after news that national high street sales are falling at their fastest rate since 2009, Marks & Spencer will be hoping that its new high profile Christmas advert featuring Paddington Bear will help drive more shoppers through its doors over the crucial festive trading period.

“However, in the face of rising pressures on consumer spending, squeezed margins and increased competition from online rivals, clearly Steve Rowe needs more than just a marmalade sandwich under his hat to pull M&S out of its current sticky patch.”

 

Jefferies International Limited
”Clothing - on track for higher sales & profit densities. M&S’ strategy to cut prices and reduce promotions (costing c3% of sales) has paid off with 1H18 full price clothing & home sales +5.3% and 2Q18 total sales +0.6% and LFL almost flat (-0.1% vs JEFe -1.5%/cons -2%). 1H18 gross margins rose an impressive 140bps (on top of substantial gains in recent years) as sourcing gains offset FX and FY18E gm guidance has been raised 50bps to +25/+75bps. Co says it has successfully reallocated space from Womenswear to Childrenswear and Home which, among other things, has seen customer satisfaction improve yoy. Our survey results confirmed M&S’ NPS reached a high of 30% in July (even though this fell back in October - see our last M&S note). In addition, M&S has seen a good transference of sales from four initial store closures and so will accelerate the pace of store closures to cut costs and improve sales and profit densities. Online sales grew 5.7% in 1H18 despite fewer promos and M&S has set out intentions to further grow its digital capability (& people), have faster delivery times and drive online sales, profitably, to c.33% of clothing & home by 2022 (from c.20%).

”Food 1H18 sales +4.4% but work to be done. M&S saw food LFL stabilise at -0.1% in 2Q18 (JEFe -1.0%, cons -0.5%) with new space contributing +4.5%, but gross margins fell 130bps and FY18E gross margin guidance has been lowered 75bps to -75/-125bps. This is in part due to cost inflation > 2% not being fully passed on but also reflects a need to improve the breadth of range and availability. Our survey results give us confidence UK consumers want M&S Food, including online (see M&S Pent Up Demand for M&S Food Online). Whilst M&S repositions its food offer it will slow the pace of Simply Food openings but the intention is to keep growing M&S Food and make it accessible to more people (particularly families for a wider, better value food shop).

”International exits completed, new focus on reducing costs by at least 10%. Much of the 1H18 9% PBT beat vs cons came from international increasing profits to £60m. Looking ahead, M&S believes it has a significant opportunity to cut legacy & structural costs (in property, IT, supply chain, head office) by at least 10% (implication £340m savings, some of which will be reinvested). CFO Helen Weir will finalise the plan but intends to hand over next year to a new CFO as Helen wishes to pursue a “plural career”.

”Keeping on improving, retain Buy. The strategy to improve M&S will never be completed but is more of an ongoing strategy to modernise the culture and keep finding cost savings to enable investment in the customer, digital processes and a faster supply chain. We think the risk/reward is attractive here.”

 

Kantar Retail
”As expected, Marks and Spencer Group’s interim results are a story of two-out-of-three. Across the group’s three reporting divisions, two divisions are growing topline revenue. These are Food, growing at 4.4% for the first half year, and International growing at 2.3% in the period. The third division, however, is Clothing & Home. The non-food division delivered a surprise performance with flat sales of 0.0%.

”From an overall total group performance the positive non-food result should provide optimism to the company and its shareholders. This division is the core of the group’s brand and media image and has become a strong focus for management’s hopes of a turnaround with several industry heavyweights joining M&S’s all-star team. Notable new hires are Jill McDonald, formerly CEO of Halfords, and Archie Norman, a restructuring specialist who takes over as Chairman. With CEO Steve Rowe, this trio will certainly be hoping that their newly unveiled Paddington Bear Christmas campaign can revitalise the full-year picture for non-food and deliver positive revenue growth for the full-year.

“What will probably get lost in the conversation around non-food and Paddington Bear is that the Food division is performing well despite an increasing number of obstacles. Management is clear on these challenges and appears to be ready to take on both Aldi and Lidl who have increased the quality and the number of options available to consumers in their meals-for-tonight ranges. Likewise, the company appears confident that they can compete with Tesco and Morrisons who have made significant strides improving their premium own-label offers. Amazon’s takeover of Whole Foods puts a new competitor in the frame. It will certainly be interesting to see how the ‘meals for now’ competition heats up with M&S’s newly launched home delivery programme coming out of testing phase right as Amazon’s Whole Foods integration programme comes to fruition. The expectation should be to see some sparks fly.”

 

Nick Bubb
”Marks & Spencer: We flagged yesterday that the market was expecting a 10%/12% fall in first half profits, ahead of today’s interim results, but M&S, as usual, has engineered a positive beat, as the outcome of £215m in adjusted PBT is only 5% down (thanks to a surprisingly strong recovery in International profits)…Mind you, that is before a chunky £101m of exceptional costs, including an embarrassing £46m charge for under-recording of historic depreciation and £27m for the “consolidation” of the London HQ. As for the all-important Q2 sales numbers: both Non-Food and Food are down by 0.1% (aka a tad), which is mildly disappointing, but gross margins have gone in opposite directions, with Food gross margins down by 130bps in H1, but Non-Food gross margins up by 140bps. There is nothing about current trading, but the focus of the 9.30am analysts meeting is on CEO Steve Rowe’s plans to “Accelerate our UK Clothing & Home space rationalisation plan” and to “Reposition our Food business including slowing our Simply Food store opening plan” and on what influence the new Chairman Archie Norman is having behind the scenes…and on why the FD Helen Weir has suddenly decided to pursue “a portfolio career”… ”

 

Savvy, Shopper marketing agency
“This morning’s news from M&S, while slightly ahead of expectations, highlights some of the challenges ahead for the retailer. These broadly fall into two buckets.

”First, the structural challenges. In large part these relate to the retailers’ large estate of stores – many of which require investment and find themselves at the wrong end of an evolving high street. It is our view that a more radical review of the store portfolio will be required if M&S is to re-establish its position as ’the UK’s essential clothing retailer.

”Second, clarification is required about who it is targeting after the somewhat outdated ‘Mrs M&S’ approach. We hope to understand soon how M&S plans to reconnect with the shoppers of Britain, in recognition that the nation is changing in way it shops and buys goods. Whilst M&S is one of the UK’s most loved brands, that love won’t be enough to keep the retailer in profit in the long term. It needs to recapture the hearts and minds of shoppers for the longer term.

”Wobbly consumer confidence as we enter the retail golden quarter means that M&S faces a challenging short term and the to redefine their business for the longer term.”

More to follow …