Marks & Spencer's first quarter trading update was broadly in line with the group's prior expectations, with total revenue up 1.8% at constant currency to £2.5bn. The shares dipped slightly on the news.
M&S is in the early stages of a turnaround. CEO Steve Rowe has grand plans to refocus the range and restructure the store estate.
The group has had problems with its clothing division for years, and despite its best efforts, many, especially the younger generations, still find its offer unappealing.
The restructure will see M&S end up with around 60 fewer UK Clothing & Home stores, with many of the remaining shops getting a revamp. The international business is also being shaken up, with the group switching to a franchise model overseas and exiting 10 loss-making territories.
Its vast, empty shops are doing little to improve the company's image, so a change seems sensible. However, diagnosing the illness and applying the cure are very different things. The changes to the store estate are likely to come with a bill for at least £500m, so special dividends might well be off the table for a while, which clearly raises the stakes for Mr Rowe.
Sales are still going backwards, but to be fair there are some pretty strong headwinds blowing in the retail sector just now. Importing textiles is more expensive as a result of sterling's weakness, and inflation has overtaken wage growth. On a brighter note, the group looks to be successfully shifting away from sales and markdowns, and is managing stock levels well. This should be good news for margins.
The Food division, which generates over half of group revenue, has performed strongly in recent years, and further expansion is in the pipeline. However, momentum in existing locations is stalling. With 250 stores set to pop up in the three years to 2019/20, the worry is that this trend continues, and these new stores cannibalise existing sales.
M&S shares now trade at 11.9 times forecast earnings per share, and offer a prospective yield of 5.5%.
First quarter trading
Revenue from the UK, which makes up almost 90% of the group's total, grew 2.6%. However, the timing of Easter boosted this figure by 0.6-0.7 percentage points. With like-for-like (LFL) sales in negative territory, this top-line growth continues to be driven by the addition of new Simply Food stores.
In Clothing & Home, LFL sales growth was -1.2%, leading total revenue down 0.5% to £852m. Nevertheless, with no clearance event in the quarter, the group was pleased to report growth in full price sales. The sale event instead starts today, with terminal stock for the season well below last year.
Within Food, revenues grew 4.5% to £1.4bn, however LFL sales, which strip out the impact of new stores, dipped 0.1%. The group says new stores are performing ahead of expectations, but market conditions remain competitive.
International sales in the quarter were £272m, down 4% at constant currency. In line with previously announced plans, the group is scaling back its international operations, and has already exited from 28 of the 53 stores identified for closure.
Total online sales grew 5.8% to £185m.
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