M&S chief executive Steve Rowe says turning around the retailers clothing and home businesses is a priority

M&S chief executive Steve Rowe says turning around the retailer's clothing and home businesses is a priority

The new boss at British high street giant Marks & Spencer has set out his plans to turn around the retailer's key clothing division by lowering prices and improving style, fit and quality – after the troubled unit saw like-for-like sales slump 2.9% over the past year.

Steve Rowe, who took over the reins as chief executive last month, also warned that efforts to improve the clothing and home ranges will "take time" and will weigh on profits in the short term.

The new strategy includes a reduced number of promotions and sales, a move away from fashion to focus on contemporary styles and wardrobe essentials, better fabric, fit and finish, and investment in store staffing. The retailer also intends to undertake a review of its chain of shops.

"We are confident that our commitment to delivering the right product, price and service will help return Clothing & Home sales to growth," Rowe said.

"Our customers tell us that product duplication makes shopping with M&S confusing and that navigating through our sub-brands to find what they are looking for requires effort. We also fail to deliver on availability, meaning that customers can't always find the products they want.

"We will address this by reducing the number of products we sell in our autumn/winter ranges, stripping out duplication and buying with greater depth and authority so that we have a strong offer in all our stores regardless of their size."

The changes were unveiled today (25 May) as the company reported a 4.3% rise in full-year underlying profits to GBP689m (US$1.008bn) as group revenue rose 2.4% to GBP10.6bn. However, pre-tax profit tumbled 18.5% to GBP488.8m from GBP483.3m on one-off costs of GBP200.8m.

In the retailer's UK business, revenues on a reported currency basis rose 2.7% to GBP9.47bn and underlying operating profit was up 8.4% to GBP726.7m. But it said "continued difficult trading conditions" in markets such as Russia, Turkey and the Middle East were responsible for a 0.3% decline in international revenues to GBP1.08bn and a 39.6% drop in operating profit to GBP55.8m.

M&S said that its food business, which accounts for about half of its profits, continued to perform well.

In addition to the 2.9% fall in like-for-like clothing and home sales over the year, the unit overall saw total sales slip 2.2% over the 12 months to 2 April.

That said, one bright spot was a 245bps rise in gross margin in the clothing and home unit to 55.1%, driven by improved buying margin as the retailer moves to a more flexible and direct sourcing operation.

This has unlocked lower costs through better buying and sourcing migration to lower cost countries. But even so, some of the buying margin gains were eroded by higher markdown costs due to more sale stock and higher promotional costs.

The gains have been achieved under the guidance of former Next Sourcing executives – brothers Mark and Neal Lindsey – who joined M&S in 2014, and have helped get better deals with suppliers by cutting out middlemen. The retailer has also established a number of in-country teams to stimulate competition between clothing suppliers in a bid to encourage more efficient output, better designs and lower cost-price contracts.

It was suggested this week that Rowe is in the early stages of reviewing whether their contracts should be extended when they expire next spring, as the retailer has eked out most of the potential cost-savings generated by improving the efficiency of its supply chain.

M&S to see "departure" of sourcing chiefs?

Moves already made by M&S to try to bolster its clothing business have included changes to its management structure in order to drive "speedier decision making", including the formation of an operating committee to oversee business development and strategy.

M&S simplifies management for speedier decisions

It has also reshaped its buying to focus on product category rather than sub-brand.

And in the final quarter, it started to take action on sharpening up price points, reducing prices of some 300 core products. Efforts to improve availability by buying in greater depth but in fewer products have led to an improvement in spring/summer 16 launch availability of 20%, the retailer says.

First feedback

First feedback from analysts suggests M&S faces "a tall challenge" in trying to revitalise its clothing business, given that its share of the UK clothing market has been eroded year on year, falling from 10.5% to 8.7% between 2010 and 2015.

"Investment in price, product quality, availability and customer service is a message we have heard before from M&S, but the sacrifice of profitability signals a stronger commitment this time round," notes Honor Westnedge, lead analyst at Verdict Retail.

"As well as focus on price positioning and style authority to improve its clothing business, both of which are essential in driving footfall back into stores and online, M&S has put a large emphasis on the importance of customer experience. It hopes to slim down its clothing offer further and reduce duplication across ranges to remove shopper confusion.

"Again, this was addressed a few years ago but under Rowe's new management structure and shift in its buying strategy (buying by product category, not by sub-brand), issues of repetitiveness across collections should be prevented – though communication between product buying teams is vital to ensure final ranges are coherent and the sub brands target their core customer segments.

"Despite facing a tough economic climate and a potential weakening in consumer confidence in 2016, we would expect to see initial sales improvements filter through in its half year results in November."

Bernstein analyst Jamie Merriman believes "price reinvestment will drive some volume improvements, but...it will be difficult for this shift to truly improve market share. In our view, this signals a move to be more mass-market at M&S."

He adds: "We believe the first look at Rowe's strategy will disappoint investors as it seems that M&S will continue to titrate the balance between like-for-like growth and gross margin in general merchandise, rather than take the more difficult steps of addressing their strategic issues, which we believe lie in the stores.

"While management suggested that they will address the store portfolio, the international business, and the organisation in autumn, it will be approximately six months before we get the next strategic update."