For years, Simply Food has bailed out falling clothes sales at Marks & Spencer as it defied a wider grocery market slump. However, this week M&S revealed mounting food price inflation is finally taking its toll and signalled its intention to retrench and protect margins.
Overall profits crashed 18% in the first half as its food margins were squeezed more than expected by input inflation. Gross margin in the division shrank by a bigger-than-expected 130 basis points year on year to 31.3%, as M&S tried to limit price increases to protect sale volumes.
Food revenues rose 4.4% to £2.8bn in the 26 weeks to 30 September, but that was driven entirely by the opening of 24 new Simply Food stores as like-for-like revenues declined 0.1%.
City Index said M&S’ “food fumble” had been exacerbated by management’s response to input cost inflation. “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.”
A more upbeat Barclays commented: “Clearly the food business will need to reinvest in price in the coming years - but a confident view on cost savings should limit damage to net margins.”
The stock fell in early trading, but ended the day 1.6% higher at 333.1p as the City backed the retailer’s turnaround strategy.
On Thursday Sainsbury’s revealed an Argos-driven 17% jump in first-half sales to £16.3bn as like-for-like sales rose 1.6%, but slowed from 2.3% in the first quarter to just 0.6% in the second. Underlying pre-tax profits tumbled 9% to £251m as losses at Argos, efforts to keep prices down and the national living wage all dragged down profits.
Shore Capital commented: “Sainsbury’s needs to deliver sound revenues to fully harvest anticipated synergies from the Argos acquisition and ongoing cost savings.” Shares dropped 2.2% in morning trading to 228.4p, taking its share price decline so far in 2017 to 8.4% - and by almost 20% since late May.