UK retail giant Marks & Spencer has finally broken through the GBP1bn profit barrier for the first time in more than a decade. But instead of rejoicing at its turnaround under the guidance of CEO Sir Stuart Rose, industry observers are focusing instead on a tough year ahead amid falling sales, increased costs and what some believe is an ill-advised foray overseas. Leonie Barrie reports.

Britain's largest clothing retailer, Marks & Spencer, reached a milestone in its history on Tuesday (20 May) when it posted a full year pre-tax profit of GBP1.007bn (US$1.98bn) - its best performance for a decade.

But any relief at achieving this magic number has been tempered by chief executive Sir Stuart Rose himself, who talked down the achievement. "A number is a number," he said, "We shouldn't get over-excited."

The focus instead seems to be on whether or not M&S can ride out a slowdown in consumer spending.

And closer inspection of its results suggests that its full recovery and repositioning into a sustainable and profitable business may still have some way to go. 

Trading during the year got steadily worse, with total and general merchandise sales - which includes clothing and footwear - down 0.5% on a like-for-like basis in the UK.

However, in the final quarter of the year, like-for-like sales - which strip out new store openings - fell 1.7%, with an even more worrying 3.1% slump in the general merchandise category.

This low profit and sales growth means executive directors and senior managers will miss out on their annual bonus - which last year came to GBP91.0m.

M&S said it is also trimming GBP200m from the budget allocated for its expansion in the UK and overseas, and that 80 - not the 90 stated previously - of its stores will be modernised by next March.

Commenting on trading for the first seven weeks of the current financial year, Sir Stuart noted "consumer confidence has fallen off."

He added: "We expect market conditions to remain difficult for the foreseeable future and are managing our business accordingly."

Growing pains
M&S executives say their battle plan for tackling the consumer slowdown is to cut costs - GBP50m in savings has been identified for the coming year - while setting up the retailer for long-term growth by going after new opportunities.

Capital expenditure for the year ahead will be a massive GBP800-900m, and will include expanding its business in the UK and abroad by opening more new stores and continuing to refurbish old ones, and stretching the brand into new product areas.

It also sees potential to develop its online business, M&S Direct, where sales rose 63% last year helped by new products such as Big and Tall men's wear and made-to-measure shirts.

M&S' global business in particular seems to be driving growth, albeit from a relatively small base, with a 16.8% rise in annual sales to GBP712.9m far outstripping the 4.2% increase seen in the UK.

Overall, the group has 622 UK stores and 278 international outlets.

Last November the retailer revealed it wants its international business to account for 15-20% of group revenues, and has recently inked distribution deals in Central and Eastern Europe with Marinopoulos Group and with Reliance Retail in India.

It is also pushing ahead with plans to open its first store in China this autumn.

Analysts, however, question the wisdom of opening more selling space in the midst of a consumer downturn, and point out that it could take at least five years for M&S to reach its overseas sales targets.

And no doubt many also remember the experiences at the turn of the century when M&S was forced to close 38 of its continental stores, including its Paris flagship.

They also suggest M&S would be better advised to focus on reducing overheads in its home market before throwing huge amounts of capital at potentially choppy overseas waters.

UK operating costs are expected to increase by around 7% over the next 12 months, with a 4.5% increase in general merchandise selling space.

Clothing market share
Lowering the opening price points of its clothing merchandise has helped bring more customers into M&S stores, with the retailer lifting its volume share of the market by 50 basis points to 11.2% in the year.

But even this strategy has come under fire. "You have to run very hard" to make up for the fall," Sir Stuart himself pointed out earlier this year.
In value terms, M&S continues to be the UK's largest clothing seller with a market share of 11.0%.

But it has spread itself thin by trying to compete for cash-strapped customers with cheaper labels like George at Asda and Primark, as well as cater for consumers who think nothing of spending GBP800 on a shearling coat.

Some observers wonder whether it is wise to take on value retailers and the supermarkets by bringing down opening price points on some M&S clothing - and whether M&S has gone too downmarket in the process.

Others caution that sales of the more expensive clothing lines such as Autograph, Limited Collection and Per Una, which generate around GBP1bn in revenues, could be hit as customers trim their spending.

Annual clothing revenues rose 0.8%, but lagged by 1.3% in the second half of the year, the retailer said.

General merchandise gross margin in the year was level at 52.6%, as the retailer had to introduce higher markdowns to clear stock.

Role reversal
On top of concerns about M&S' performance over the next year and beyond, controversy surrounds Sir Stuart's role at the helm of the retailer.

A group of disgruntled investors has criticised plans for Sir Stuart to take on the additional role of chairman until 2011, and there are also fears that there is no obvious successor waiting in the wings to step into the top spot when he moves on.

Last January, when M&S unveiled its worst trading quarter in two years Sir Stuart hinted it would be spring 2009 before there was any recovery. Now he says he hasn't a clue how long the downturn will last.

There is certainly little prospect of the GBP1bn profit mark being repeated during the current year, and analysts the headline figure may fall as low as GBP800m.

There are few, if any, UK fashion retailers having an easy ride at the moment, but only time will tell whether Sir Stuart's legacy is to have built M&S into a stronger business.