Profits down, stores set to close
First half profit is down 18.6% on an underlying basis, with continuing weakness in clothing & home. The interim dividend is unchanged, but the costs associated with the group's overhaul of excess sales space means special dividends should not be expected for some time. The shares fell by 5% on the news.
Marks & Spencer has had problems with its clothing sales for years, and like-for-like sales numbers are moving swiftly south.
Having already refocused the clothing offering, half year results brought the latest instalment of the M&S turnaround plan: a restructure of the store estate. M&S will end up with 60 fewer clothing & home stores, and many of the remaining shops will be getting a revamp. The loss making international business is also being shaken up, with M&S moving to a franchise model.
Despite the group's best intentions, many, especially younger shoppers, find the group's clothing offer unappealing. This is at the core of M&S's problem, and vast, empty shops are doing little to improve the company's image. A change seems sensible.
However, diagnosing the illness and applying the cure are very different things, and removing unwanted stores doesn't come cheap. Over half a billion pounds is to be spent on re-focusing the estate. This extra cost means that special dividends have been kicked into the long grass for the foreseeable future.
Reducing shareholder returns raises the stakes for Mr Rowe, and unfortunately for him there are some pretty strong headwinds blowing in the retail sector. Consumer confidence is low, and the sharp fall in the pound means margins are being held back.
On a more positive note, the Food division, which generates over 50% of group revenue, has performed strongly in recent years. Expansion is planned, with plans to open around 200 Simply Food Stores by the end of 2018/19.
M&S now trades on a PE ratio of around 11.8x, and offers a prospective yield of 6%.
First half trading in detail:
H1 group revenue of £5bn is up 0.9% on last year, driven by the continued expansion of the Food division.
Food sales grew by 4%, however with like for like (LFL) sales falling by 0.9%, this was due to the 21 net new stores opened in the period. The market remains challenging, and despite the declining LFLs, the group says that the Food business increased its market share. Gross margins increased to 32.6% (up 0.1 percentage point).
Clothing & Home sales declined by 5.3%, with LFL sales dropping by 5.9%. After consolidating the clothing offer, the group say that customer satisfaction and availability have improved, and volumes are showing more positive signs. Gross margin rose 0.1 percentage points to 56.7%.
The interim dividend is held at 6.8p per share.
Looking forward, M&S has announced a restructure of its store estate. The Food business is set to expand, with a further 200 stores opening by 2018/19, however M&S will end up with 60 fewer UK clothing stores (10% of UK Clothing & Home sales space) and 53 overseas stores, exiting 10 international markets. Rather than own and operate its own stores in these markets, M&S will switch to a franchise model.
The costs of the above measure is set to be around £500-550m over the next five years.
With sterling falling, guidance for full year margin improvement in Clothing & Home is reduced to 0-0.5 percentage points.
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