Marks & Spencer this morning released a trading statement covering the 13 weeks to 2 July 2016. Clothing & Home like-for-like sales fell sharply in the quarter, and the news pushed the share price down 2% this morning.
Like-for-like (LFL) sales fell by 0.9% in Food, and by 8.9% in Clothing & Home, however M&S say that the timing of Easter held back Food LFLs by 0.5% and Clothing and Home by 0.8%. With more new Simply Food stores continuing to open, total sales in Food grew by 4%, while Clothing & Home total sales fell by 8.3%.
M&S.com sales increased by 0.5%. International sales increased by 6.1% at reported currency, however stripping out the effect of currency changes gives growth of 0.7%. Total group sales were down by 0.4% (down by 0.9% at constant currency).
Steve Rowe, group CEO, says that a reduction in total sales in Clothing & Home was expected as a result of running fewer promotions and lowering everyday prices. He believes that the early signs are encouraging for the new strategy, and full year guidance is unchanged. Bloomberg consensus is for earning per share to fall by around 12% in this year.
Marks & Spencer have been trying to solve the perennial problem of declining clothing sales for years, and the new CEO Steve Rowe intends to improve the Clothing and Home division by targeting a shift towards everyday lower prices, while maintaining their reputation for quality.
His strategy makes sense on paper, as does the move to focus on the core customer. Although Mr Rowe may have correctly identified M&S' core customer as a middle-aged woman, tagging her as 'Mrs M&S' wasn't particularly well received. Similarly, despite their best intentions, many, especially the younger shopper, find the group's clothing offer unappealing. Like-for-like sales numbers moving swiftly south over recent years reflect this.
There are brighter spots though. Capex is set to be lower than in recent years, as a result of the completion of significant infrastructure spending, and clothing margins have been well-protected in the face of falling sales. Looking forward, the Sparks loyalty card and the potential of the online division could provide sources of growth.
The other side of the business, the Food division, which generates over 50% of group revenue, has performed strongly in recent years. Expansion is planned too, with plans to open around 100 Simply Food Stores per annum for the next few years.
Unfortunately for Mr Rowe, it appears that he has stepped up just as uncertainty over the UK's economy has started to crank up. These concerns have seen shares in the UK's retail sector fall in value in recent weeks.
With the bulk of sales in the UK , any negative impact on the UK consumer will hurt M&S, and unless we get a rebound in Sterling, M&S' cost of buying supplies from abroad will be impacted too, once their hedges run out next year. The profit impact of Brexit comes on top of what M&S had already warned would be significant near term costs, as a result of implementing their new strategic direction. M&S now trades on a PE ratio of around 9 .6x with a projected yield of 7.3%.
All yield figures are variable and not guaranteed.