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Marks & Spencer - guidance unchanged but challenges remain

Sophie Lund-Yates | 9 January 2020 | A A A
Marks & Spencer - guidance unchanged but challenges remain

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Marks & Spencer Group plc Ordinary 25p

Sell: 99.06 | Buy: 99.40 | Change -2.94 (-2.92%)
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Group sales were down 0.7% in the third quarter to £3bn, ignoring the impact of exchange rates. This reflects ongoing challenges in Clothing & Home, although Food performed well.

The group also said Clothing & Home online sales were lower than expected.

The shares fell 7.5% following the announcement.

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Our view

Competition in the Clothing & Home space is at fever pitch, and it's a battle M&S isn't quite winning. Stifling competition and burdensome costs of maintaining a store estate are a chain round the group's ankles and hurt profits.

Declines in Clothing & Home are becoming less dramatic, but there are still real challenges. The onslaught of promotional activity in the sector means price tags have to be lowered in order to compete, and gross margins struggle. Another concern is M&S can't purely blame external pressures for its challenges.

M&S proved it's capable of getting its ducks in a row with Womenswear, which saw a positive reaction to Autumn ranges - by comparison Menswear and Gifting underperformed at Christmas. That means we have to ask if some challenges are driven by simply having the wrong items on shelves. Considering the already difficult climate, home-made issues are something the group could really do without.

In the group's defence, it's in the midst of its latest turnaround, with store closures and improvements to digital capacity well under way. Thing is, that doesn't come cheap - M&S has written off over £975m in exceptional costs in just the last few years -and ideally all the hard work would be showing sprightlier results.

However, the food business has turned a corner.

The division is actually beating the wider market, and the decision to lower prices and simplify promotions is paying off. A particular bright spot is the increase in repeat business ahead of rivals, suggesting the group has really tightened its customer proposition.

Then there's Joint Venture (JV) with Ocado, with M&S food products available on Ocado's website later this year. That could provide another sales boost.

We also like that running it as a JV means it's more of a plug and play option, so execution risk is reduced. Although, given the deal had a price tag of £750m, and was funded by a dilutive rights issue, there's pressure for the deal to pay off.

Overall, there are green shoots of progress. But with the remaining challenges in Clothing & Home, the work isn't over. The prospective yield is 4.9%, but with the dividend set to rise in line with earnings, the strategy needs to deliver more growth if that's to increase.

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Third quarter trading details

Within the UK, Clothing & Home sales fell 3.7% to £1.1bn, representing a like-for-like (LFL) decline of 1.7%. M&S said there are signs of continuing recovery in Womenswear, but this was offset by a weak performance in Menswear and Gifting, and trading was particularly challenging in the lead up to Christmas.

Clothing & Home online revenue grew just 1.5%, driven by increased discounting by competitors.

Food saw a LFL uplift of 1.4%, which fed into an overall increase in revenue of 1.5% to £1.7bn. Performance was strong in the 2-week Christmas period, as customers responded well to lower prices.

Overall, total UK revenue fell 0.6%, with LFLs down 0.2%.

International revenue fell 2.3%, reflecting discounted prices. However this is said to have resulted in increased volumes.

Full year guidance is unchanged, but gross margins are likely to be at the lower end of expectations. M&S believes the impact on profits will be largely offset by cost savings.

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