Shares in high street bellwether Marks & Spencer (MKS) have shot up to a new seven-year high this morning as the group revealed it had performed ahead of the grocery market in the fourth quarter and had reversed 14 straight quarters of declining fashion sales.
Total food revenue grew by 3.7%, and by 0.7% on a like-for-like level, as consumers flocked to the upmarket proposition for special occasions, with record Valentine’s Day sales. The retailer also introduced more than 350 new products in the 13 weeks to 28 March.
M&S said it continued to invest in price to stay competitive in what was a tough, deflationary market but had protected its gross margin, with full year guidance of +10 to +30 basis points remaining unchanged.
Shore Capital analyst Clive Black added that M&S was not immune from the “vagaries of the British grocery market” but it was well positioned to make progress. “Indeed, where the major supermarket groups cut capital expenditure and largely abandon store opening programmes, M&S is pressing on with its Simply Food expansion, with about 200 additional stores over three years,” he said.
CEO Marc Bolland has also finally managed to halt the decline in the general merchandise division, which has fallen for the past 14 quarters. The clothing and home arm nudged like-for-like sales up by 0.7% in the three months to 28 March – with total sales up 1.3% – to beat analyst expectations of a 1.2% drop. It compared with a 5.8% fall in the previous quarter. M&S said the reversal had been driven by “continued focus on product quality and styling”, with the spring/summer ranges being well received by customers.
The retailer added it had promoted less in the period and focused more on full price sales. However, this was partly off-set by more stock going into the Christmas sale as a result of the “unseasonal conditions” through the autumn/winter season.
“We have made strong progress over the quarter,” Marc Bolland said. “In food we delivered another excellent performance, with sales growth ahead of the market. We continued to deliver on general merchandise gross margin, and are pleased that we have achieved this whilst also improving general merchandise sales. M&S.com has returned to growth, as planned, with further improvement in customer metrics.”
Investec noted the trading update was “likely to be taken well” as M&S put the online issues over the past year behind it when it was plagued by problems at its distribution centre in the Midlands. Online sales at M&S.com returned to growth – up 13.8% – with traffic, conversion and customer satisfaction continuing to improve. The new distribution centre at Castle Donington, where M&S had invested £150m last year, performed well during the quarter putting the teething problems from Q3 behind it.
However, profits for the year at M&S will be dragged back by difficulties in its international business, with Russia, Ukraine and Turkey all presenting problems coupled with the negative impact of currency fluctuations.
Sales around the world were down 3.8% in the quarter with management warning that profitability in the second half had taken a significant hit. ShoreCap predicted a £15m to £20m downgrade to its £112m full-year trading profit estimate. It held its pre-tax profit forecast of £651m, though, as did Investec at £646m.
Shore retained its ‘hold’ rating of 530p on the stock as it kept a “watch and wait” approach ahead of the full-year figures in May. “Happily, we are in a position to be a little more sanguine about M&S with the improvement in UK GM sales,” Clive Black said. “Such progress is largely factored into the present stock price to our minds, heightening our interest in the preliminary results on the 20 May 2015 and creating the question as to whether or not ahead of that event or around it there may be market upgrades to forecasts.”
Investec has a ‘buy’ rating on the shares with a target price of 580p. Analyst Kate Calvert said: “We continue to see a material gross margin opportunity in general merchandise, which we expect to drive forecast upgrades over the next few years.”
However, Stephen Springham of Planet Retail was more cautious in his appraisal of the trading update. ”A return to like-for-like growth in the core clothing category would ordinarily have the champagne corks popping at M&S,” he noted. ”But the fact that this has been achieved against such weak comparables (the corresponding period last year coincided with the botched relaunch of the website) means the fizz quickly goes flat. An improving trend, yes, but still underperformance in a UK clothing market that showed as much as 4-5% growth over the period. On the right track maybe, but still losing market share.”
M&S shares were up 5.6% in morning trading to 560p – levels not seen since December 2007.
Share Price: 558.50p
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