M&S: "Back to black, back on track"

M&S: "Back to black, back on track"

Retailer Marks & Spencer has finally booked like-for-like sales growth in its general merchandise unit, which includes clothing and homewares, thanks to a focus on value and quality, rather than "reactionary and desperate" discounting. Not surprisingly, analysts have praised the UK retailer's first positive clothing performance in two years.

Jonathan Pritchard, analyst at Peel Hunt:
"The medicine is beginning to work: like-for-likes are positive in both parts of the business [food and general merchandise] and customers are noticing the improvements in range, pricing, display and service in GM. Full price market share has been won for the first time in seven years.

"It's far too early for CEO Steve Rowe to be lighting a celebratory cigar though: much remains to be done on product and fending off the competition. But the action that management is taking is beginning to gain traction with shoppers.

"The headline GM LFL is in the black for only the second quarter in six years. That, of course, implies that any comparative for the business right now is straightforward, but it is highly reassuring that the early signs are that the customer is responding to M&S' urgings.

"Steve Rowe was clear from the off that pricing, merchandising, quality and service had to improve and the investments there will have a short-term impact on profit. But the pick-up in LFL suggests that customers are noticing the changes and opening their purses and wallets. Full-price sales were up in every clothing category, to the extent that management believes that M&S has won full price market share for the first time this decade.

"The Rowe team has also been resolute on removing discounts. Headline sales were better this year for M&S and the industry than they have been, so the temptation to reach for the promotional button will have been less intense but nonetheless the % of discounted product continues to fall (which of course deflates the headline LFL). That has positive implications for the gross margin. Cost growth so far has come in below guidance, which is encouraging.

"We expect LFL to stay positive (underlying) in Q4, in which there is no Easter. Momentum has returned here and we don't think it will ebb away as management keeps trying to improve the offer."

Clive Black, director and head of research at Shore Capital:
"Very pleasing progress from Steve Rowe We would expect the market to respond warmly to this update, noting management's balanced, nay cautious, comments on the UK outlook. That said, there is a lot going on in the business and this early win needs to become a trend for the stock to fulfil its undoubted potential in our view, particularly with respect to the scope to harvest positive operational gearing."

Jamie Merriman, analyst at Bernstein:
While some of this strong performance was due to timing (the inclusion of the week after Christmas is this year's Q3 number) and will reverse in Q4, we expect investors will be encouraged by management's positive tone and continued commitment to reduce promotional levels.

"With respect to numbers, sales expectations will likely come up for the year, despite the anticipated timing reversal in Q4, but so too will cost expectations. This is an area where M&S has historically beaten expectations given weaker sales, but with better sales will be higher cost growth."

Honor Strachan, lead analyst at Verdict Retail:
"It was a huge risk to footfall and volumes to significantly reduce the level of promotions and discounts in Q3, given the intensity of price cuts elsewhere on the high street and greater retailer participation in Black Friday. A risk Marc Bolland didn't dare take – not to this level anyway. Demanding consumers have become so accustomed to discounts, Steve Rowe's plan had potential to backfire, but seemingly the quality and value of its products – particularly in knitwear and cashmere collections – was enough to lure shoppers in.

"Moreover, permanent price drops across clothing during 2016 will have aided shopper conversion levels. While the difference in trading period versus last year has inflated clothing & home growth by 1.5%, and it was up against terrible comparatives, this should not take away from the fact that M&S's strategy to focus on value, rather than reactionary and desperate discounting, has paid off with like-for-likes up 2.3% in the non-food division.

"M&S has also bought into the autumn/winter season more carefully and more strategically. Despite driving full price sales throughout much of the quarter, it entered the sale with 7.0% less stock, having eliminated overlap across collections and focussing on improving the availability of best-selling lines. The test now is to continue this momentum into spring/summer – a season which is harder for M&S to buy for than autumn/winter, due to lighter weight fabrics and designs making consumers more willing to trade down."

Marks & Spencer quality focus finally lifts clothing sales