Marks & Spencer (MKS) has reported a 1.4% rise in first half sales to £5bn, driven by its continued outperformance of the troubled UK grocery sector.
Sales in its food stores were up 3.3% in the 26 weeks to 26 September - rising 0.2% on a like-for-like basis.
Second quarter sales were up 3.4%, compared to first quarter growth of 3.2%, and represented the 24th consecutive quarter of like-for-like food growth.
Food gross margin was down 25bps at 32.5% due to investment in pricing and the “unseasonal conditions” over the summer resulting in a small increase in the cost of waste. However, M&S said these pressures were offset by volume growth and ongoing operational efficiencies.
“Despite the ongoing competition and deflation in the food sector, we continued to outperform the market by c.3% points,” the group said. “We continued our focus on improving operational execution, delivering more choice for customers as well as working with our suppliers to generate cost efficiencies which have allowed us to invest in both product quality and lower prices for our customers.”
M&S said innovation had been a key driver of growth, with almost 900 new products introduced in the half. The opening of 32 Simply Food stores, with sales performance ahead of expectations, also helped.
The food sales boost helped M&S shares rise by 3.2% in early trading to 537.9p, the highest level the shares have traded at since mid-August.
General Merchandise sales fell by 0.4% and by 1.2% on a like for like basis, although gross margins came in much higher than predicted at 285bps after the retailer focused on “full price sales” and reduced discounting. M&S.com sales improved by 34.2%.
The increased gross margin helped the group increase underlying pre-tax profits more than expected to £284m – a rise of 6.1%. After £68m of exceptional items, mostly made up of UK and international store reviews, pre-tax profits fell 22.7% to £216m in the half.
CEO Marc Bolland said: “We delivered good underlying profit growth in the first half and made strong progress against our key priorities.
“Our food business again outperformed the market by over 3% points as our focus on quality and innovation continues to set us apart. In general merchandise we decided to improve profitability by focusing on gross margin, delivering another significant increase, which in part resulted in slightly lower sales. As a consequence of good performance and strong cash generation we have decided to increase our dividend.”
International sales slipped 0.9% to £506.6m in turn leading to operating profits overseas plunging more than 50% to £24.7m.
In terms of outlook, M&S said: “Despite some improvement in consumer confidence, market conditions continue to be challenging in both the UK and the international markets. Our short-term priorities remain the same: food sales growth, GM gross margin improvement, improved GM performance and strong cash generation.”
M&S shares are up by more than 30% over the past year, but have slipped from their eight-year high of 600p reached in May.
Shore Capital analyst Darren Shirley commented: “We cannot deny that we would much rather be writing about stronger GM trading from M&S, so seeing through the positive momentum that commenced at the start of calendar 2015… Against these constraints M&S has a cracking Food operation where underlying performance is strong in a difficult UK market with sustained gains in market share, alongside what we deem to be aforementioned good capital management, which provides us with comfort.”
John Ibbotson, director of Retail Vision added: “Profits may be up, but this progress has come at a dangerously high price – M&S has begun to sacrifice quality in its core womenswear battleground.
“M&S’s successful food business continues to be a useful ‘get out of jail’ card, but its ability to save the brand’s skin is being undermined by food deflation. With like-for-like food sales up by a paltry 0.2%, the weakness in the clothing operation is becoming ever more exposed.”