Marks and Spencer (MKS) has decided that if you can't beat 'em, don't join them, either. The retail giant held off from aggressive discounting on clothing over the summer, and has a 285 basis point improvement in its general merchandise gross margins to show for it. That's well ahead of the 150 to 200 basis-point improvement previously expected, and management reckons full-year margins could rise by between 200 and 250 basis points. M&S has worked hard to improve efficiencies in its supply chain with the help of veteran rag traders Mark and Neil Lindsey. The brothers were credited with transforming rival group Next (NXT) into a profitable business, mainly by improving the way it sources clothing.
Despite this progress on margins, reported profit plunged. That reflected three massive charges: a £27.5m provision for PPI mis-selling, a £22m impairment relating to underperforming stores in western Europe and store closures in the Balkans, and a £26.7m charge recognised as part of a £90m programme to improve the UK store estate. Excluding these charges, underlying pre-tax profit rose 6.1 per cent to £284m.
Meanwhile, the group's top line told a familiar story. Opening 32 new Simply Food stores pushed total food sales up 3.3 per cent, but like-for-like sales only nudged up 0.2 per cent. General merchandise sales fell 0.4 per cent, or 1.2 per cent on a like-for-like basis, due to unseasonal weather and the focus on full-price sales. The second quarter was particularly poor for general merchandise: like-for-like sales fell 1.9 per cent, compared with a 0.4 per cent decline in the previous quarter. That's despite M&S.com's sales rising by 34 per cent in the first half.
The introduction of George Osborne's national living wage isn't expected to pose any short-term issues. M&S already pays its permanent customer assistants £7.41 an hour - comfortably above the £7.20 minimum due to be introduced next April.
Analysts at broker Investec Securities expect pre-tax profit of £715m for the current financial year, giving EPS of 36.1p, compared with £661m and 32.6p in FY2015.
| MARKS AND SPENCER (MKS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 537p | MARKET VALUE: | £8.79bn | |
| TOUCH: | 537-538p | 12-MONTH HIGH: | 600p | LOW: 402p |
| DIVIDEND YIELD: | 3.4% | PE RATIO: | 20 | |
| NET ASSET VALUE: | 187p* | NET DEBT: | 72% | |
| Half-year to 26 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 4.9 | 279 | 14.0 | 6.4 |
| 2015 | 5.0 | 216 | 10.5 | 6.8 |
| % change | +1 | -23 | -25 | +6 |
Ex-div: 12 Nov Payment: 8 Jan *Includes intangible assets of £875m, or 53p a share | ||||
