Marks & Spencer Q4 update: What the analysts say
Analysts welcomed the retailer's clothing sales growth
Marks & Spencer this morning (2 April) reported an increase in fourth-quarter clothing sales, its first in almost four years. Analysts praised the UK retailer's positive performance given recent market share trends, and see gross margin opportunity in general merchandise overall.
Conlumino analyst Anusha Couttigane:
"This marks a far more positive set of results from Marks & Spencer compared to its post-Christmas trading update. While like-for-likes are up across all major segments, no doubt the most pleasing details were the return to positive growth in clothing and online... It also took big steps toward rebuilding its fashion credentials, launching its spring/summer range to a warm reception.
"Furthermore, sharp use of celebrity endorsement and social media has helped to create hype around its much-lauded suede ‘skirt of the season’. As images of style icons Alexa Chung and Olivia Palermo sporting the Autograph design continue to flood the internet, this is just the kind of buzz and energy that could see M&S return to fashion favour. This has been compounded by the retailer’s decision to place customers on a waiting list for the piece, aiming to create the illusion of exclusivity.
"However, with a price tag of GBP199, exclusivity may not be much of an illusion. The risk of alienating its core middle market customers as it seeks to charm younger fashion followers has been a problem for M&S in recent years. This time, the retailer has tried to combat the issue, by offering a similar, entry-level design in faux suede for GBP39.50. Although this creates staggered price architecture, it begs the question as to whether this will amplify the disappointment of average purse customers who feel they are missing out on "the real thing" and having to settle for second best."
Shore Capital analyst Clive Black:
"Following the completion of the capital intensive modernisation phase ahead of the end of FY2014, when circa GBP2.5bn was expended, M&S is operating an interesting business model to our minds. In particular, if better trading can come through in higher margin GM, then there is the prospect of positive operational gearing finally emerging on a more efficient central cost base. As such there is scope for margin expansion and very strong free cash flow, a resource that could bolster solvency ratios and make for shareholder friendly initiatives.
"Such a prospect was a central hope of ours through 2013 and into 2014. However, despite demonstrably better ranges, marketing and in-store execution, to our minds at least, the GM trading momentum just did not come through and so quarter after quarter of disappointment followed leaving us to slip back from our previously positive stance. That GM is now potentially turning the corner, admittedly against very favourable multi-year comparatives is, therefore, to be warmly welcomed. Indeed, could we now finally be at the point where we can talk about the commencement of an upgrade cycle from M&S; we would expect small market upgrades today?"
Bernstein analyst Jamie Merriman:
"M&S UK results (both GM and food) beat expectations and cost growth is lower than previously guided, but challenges in the international division due to Euro weakness and political uncertainty in Eastern Europe will likely offset these benefits, suggesting minimal change to consensus expectations...
"The strong performance in general merchandise like-for-like is a strong sign of improvement for M&S and unexpected given recent market share trends. We expect the shares to be up today given this surprise, despite the likelihood that EPS estimates will not move significantly."
Investec analyst Kate Calvert:
"Q4 UK sales are ahead with a convincing return to positive general merchandise like-for-like growth of +0.7% (clothing back to positive like-for-likes) likely to be taken well as M&S puts the online issues over the last year behind it. Despite this, we maintain our FY15E profit before tax forecast of GBP646m as international remains challenging. We continue to see a material gross margin opportunity in general merchandise, which we expect to drive forecast upgrades over the next few years."
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