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Marks and Spencer Q4 trading - Good food

Steve Clayton | 7 April 2016 | A A A
Marks and Spencer Q4 trading - Good food

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M&S has provided a short trading update covering their final quarter, to Mar 26. Entitled "Another good quarter in Food; more to do in Clothing and Home" the picture is one of continued market share gains in the foods business, with clothing sales still struggling. But the business is making progress on margins; the non-food business now expects gross margins to improve by 240-250bps for the year, whilst M&'s sales moved ahead by 8.2%. Other than the improved gross margin outcome, guidance is unchanged.

Our view:

At M&S, CEO's come and go every few years, each charged with the task of reinvigorating the General Merchandise division, whilst polishing the strongly performing Food business. Steve Rowe is the latest to grasp the baton. Mark Bolland's tenure was marked by the stubborn refusal of the GM division to generate any sales momentum.

Foods has been a clear success though. Sales in this division grew by around £800m a year under Mr Bolland's tenure, but GM sales declined by almost £200m. The infrastructure underpinning M&S's distribution has been revitalised and its sourcing capabilities reinforced. M&S has made huge strides developing its online presence. Not all of them were forwards, but it got there in the end and now has a strongly performing web business.

Holding fast and protecting margins and focusing on how the brand is presented is sensible long term thinking. The problem now is converting that discipline into sales growth. Here we run up against the perennial problem at M&S. It's worthy and reassuring, and the quality is often great. But it just doesn't appeal enough to younger shoppers, who will happily eat the food, but they won't buy the clothes.

Steve Rowe's challenge is to revitalise the GM division as successfully as he invigorated the foods business. We wish him luck, but suspect he will need it, because the relative decline of M&S's clothing business began many years ago, with market share lost to everyone from Next to Primark and now even the supermarkets.

But, the shares are cheaper than they were, and on current consensus forecasts stand on a yield of over 4%. With guidance maintained, earnings per share of around 35p look likely for the full year, leaving the dividend nearly twice covered by earnings and with free cash flow on an improving trend from this year onwards.

Q4 details

Foods delivered 4.0% sales, driven by new space and flat like-for-like (LFL) sales. M&S market share in food is now up to 4.3% with the new food store opening programme performing ahead of plan.

Clothing and Home will see the gross margin improvement mentioned above, but total sales were down 1.9% in the division, with LFL sales 2.7% lower. Within these numbers, the improved M& performance was helped by a strong rise in customer satisfaction scores following improvements to the website's speed and ease of navigation.

M&S describe the Clothing and Home market as challenging, characterised by price deflation and flat demand. The new Spring/Summer range has better availability this year and M&S are reducing their discounting activity, hampered by having more stock that had to go into Sale.

Foods opened 80 new stores in the year, driving market share forward to 4.3%, further aided by investment into new products, with 400 new lines launched over the period.

The International business is growing sales in both the franchises and company owned stores. But M&S say divisional profits will be heavily impacted by currency pressures and challenging trading conditions, not least because of the division's exposure to oil-dependent economies in the Middle East.

Describing the company's performance as "mixed", new CEO Steve Rowe flagged the food business's outperformance of the market, by 3.5% in the quarter. LFL sales in Clothing and Home were not as weak as in Q3 but remain "unsatisfactory". Mr Rowe says that turning the division around is the company's number one priority, and will detail plans to achieve this with the final results on May 25. Last year was a 53 week year for M&S, so the results will cover an additional week, to Apr 2 2016.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.