City analysts have cut profit forecasts for Marks & Spencer (MKS) by as much as 8 per cent after the high street retailer failed to deliver improved sales growth in its key general merchandise division.
Third-quarter results covering Christmas trading revealed that like-for-like sales of general merchandise dipped 2.1 per cent compared with last year, falling short of expectations for flat growth. The food business did outperform the market with a 1.6 per cent rise in underlying sales, but this was slightly behind consensus forecasts. Moreover, faced with heavy promotional activity in the high street in the run up to Christmas, M&S bowed to pressure early on and slashed clothing prices. As a result, the divisional gross margin for the full year is now likely to fall by 30 to 50 basis points, against expectations for a slight rise. This will leave the UK gross margin flat, compared with previous forecasts of a 30 to 50 basis point increase.
Chief executive Marc Bolland salvaged some credibility by pointing to early signs of improvement in the womenswear business, which posted its first market share gains in three years. Online sales were another bright spot, growing a market-beating 23 per cent. Mr Bolland said a new web platform and warehouse would further transform the 'multi-channel' business.
Numis Securities says…
Hold. M&S has posted another disappointing update. Third quarter like-for-like sales have come in light of consensus, already lowered in mid-December. We are lowering our full-year pre-tax profit forecast to £628m in light of the lower projected gross margin. Capital spending will normalise next financial year as the bulk of the infrastructure investment reaches its conclusion, leaving the shares looking inexpensive from a forward cash flow perspective. But having now posted 10 consecutive quarters of falling like-for-like general merchandise sales, we remain unconvinced by the crucial piece of the jigsaw - an improvement in the clothing business.
Peel Hunt says….
Hold. General merchandise like-for-like sales grew 0.5 per cent in the eight weeks to 24 December, implying a 7 per cent decline in October. This is still a material underperformance compared with Next. We’ve downgraded our pre-tax profit estimates for the full year by 5 per cent to £634m. Our concern is that the focus on assembling a new management and buying team for general merchandise, new ranges and marketing appears to have had little impact, with M&S forced to engage in additional promotions to clear stock. E-commerce sales increased by 23 per cent over the third quarter, but were held back by the old platform and infrastructure. With the shares trading on a 2015 earnings multiple of 12, we see no reason to chase them until M&S shows evidence of progress.
