Blog: Leonie BarrieM&S shock profit warning

Leonie Barrie | 3 July 2008

The shock profit warning from M&S yesterday is unlikely to be the last bit of bad news from the UK retail sector over the next few weeks; in fact analysts downgraded Next, Debenhams and Sainsbury’s on the back of the update, fearful of more belt-tightening by consumers and its impact on the bottom line.
At M&S, both food and clothing sales were worse than expected, prompting shares to fall by more than 24%. Its food business, in particular, has seen a reversal of its recent stellar growth, and is now being battered by consumers trading down and by strong competition from low-cost rivals. M&S has responded by sacking its director of food, Steven Esom – but there are also fears that the poor results are partly due to its rapid expansion into new food formats.

On the apparel side, which accounts for around half the retailer’s turnover, total UK clothing sales fell 3.6% – on a like-for-like basis sales of general merchandise dropped 6.2% – but M&S said it managed to hold its market share and is not bringing its summer sale forward. No mean feat and one that perhaps meant there were no executive casualties in this part of its business. Chief executive Sir Stuart Rose said volume levels of clothing are at record levels – although industry observers were quick to point out these “record levels” include new space opened in the past year.

Surprisingly, given the widespread criticism of its results, group sales were actually up 1.3% in the quarter, but this was due to a 24.5% hike in its international growth. Even though its global business accounts for just a small portion of total sales, this is likely to shore up the company’s performance in the short term. And there is also evidence that customers are switching to buying online, where sales shot up 70%.

The numbers will do little to endear Sir Stuart to the City however – or convince it that he has any real strategic plan to guide the retailer through increasingly choppy waters. Next week he faces a re-election vote at the company’s AGM amid concerns about his joint role as chairman and chief executive. The most pessimistic of analysts are also downgrading M&S full-year profits to around GBP640m – a sharp contrast to the underlying pre-tax profit of GBP1.007bn (US$1.98bn) posted last year.

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