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M&S supertanker changes course

Shares in M&S rallied as the high-street retailer reported an improvement in its embattled general merchandise division.
May 20, 2015

Final results from Marks & Spencer (MKS) came in ahead of expectations as an improved performance in the UK offset a disappointing result overseas. Underlying pre-tax profit grew 6 per cent to £661m, against consensus forecasts of £651m, thanks to significant gross margin improvement in the embattled general merchandise (GM) division.

IC TIP: Hold at 596p

Chief executive Marc Bolland concedes that GM sales "did not meet expectations" for the year as a whole, with a 3 per cent like-for-like decline. Yet they returned to growth in the final quarter, which he attributes to higher quality and more fashionable styles. Moreover, improved sourcing and buying measures boosted the GM gross margin by 190 basis points to 52.6 per cent. The Dutchman said this margin would rise by a further 150 to 200 basis points this year, prompting analysts to raise their earnings forecasts. Broker Peel Hunt now expects underlying pre-tax profit of £715m this year, giving EPS of 36.5p, a 2 per cent upgrade.

In the UK, like-for-like sales overall fell 1 per cent, but underlying operating profit grew 8 per cent to £670m, driven by GM. Last year was also the first full year in which M&S had full control over its website. There were serious teething problems to begin with - resulting in supply-chain disruption over Christmas - but online sales returned to growth in the final quarter to end the year just 2 per cent lower.

The weakest link was the international division, where profits plunged by a quarter to £92m. Management blamed the macroeconomic backdrop and political tensions in places like the Ukraine, Turkey and Russia. Food sales, meanwhile, squeezed out 0.6 per cent like-for-like sales growth.

Management trimmed capital spending by £183m to £526m and have announced a £150m share buyback scheme. Asked whether he might look for pastures new, Mr Bolland said he would stick around for at least a year, saying he had enjoyed the three years of "heavy lifting" and wanted to now enjoy the "execution" phase of the M&S turnaround.

MARKS & SPENCER (MKS)
ORD PRICE:596pMARKET VALUE:£9.8bn
TOUCH:595-596p12-MONTH HIGH:596pLOW:381p
DIVIDEND YIELD:3.0%PE RATIO:20
NET ASSET VALUE:194p*NET DEBT:70%

Year to 28 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20119.7478138.817
20129.9365832.517
201310.0354728.317
201410.3158032.517
201510.3160029.718
% change-+3-9+6

Ex-div: 28 May

Payment: 10 Jul

*Includes intangible assets of £858m, or 52p a share