M&S chief executive Steve Rowe aims to trade from fewer but better clothing locations

M&S chief executive Steve Rowe aims to trade from fewer but better clothing locations

British retailer Marks & Spencer has announced its biggest shake-up in years, with plans to remove its clothing ranges from 60 stores over the next five years and axe underperforming brands, as first-half pre-tax profit tumbled 88%.

The measures outlined today (8 November) confirm rumours circulating for the past few days, and will also see the retailer close 30 UK stores and shut 53 international stores, including all ten in China.

Steve Rowe, who took over as chief executive in April this year, says the aim is to "improve the quality and productivity of our Clothing & Home space by trading from fewer, better locations," in five years' time, as well as operate "from substantially more Simply Food stores." 

The changes will affect more than 100 stores, accounting for 25% of the retailer's estate – including a net reduction of around 10% of its clothing and home space with 60 fewer full line stores. The retailer currently operates 304 'full line' stores selling its clothing & home and food ranges.

M&S will also discontinue its Indigo, Collezione and North Coast clothing sub-brands and focus instead on its Autograph, Per Una and Blue Harbour labels.

Another 45 stores will be converted to its Simply Food format, downsized or relocated, with another 200 Simply Food stores added by the end of 2018/19.

The moves will cost around GBP50m a year over the first three years, rising to GBP100m in years four and five.

The plans come as the company said pre-tax profit plunged to GBP25.1m (US$31.1m) in the six months to 1 October, from GBP216m in the same period last year.

Stripping out one-off costs, including higher pension charges, underlying pre-tax profit fell 18.6% to GBP231m – which M&S largely attributed to lower clothing and home sales. While group revenues rose 0.9% to GBP4.99bn in the first half, total UK sales were almost flat with a rise of just 0.1% and like-for-like sales at stores open for more than a year fell 3%.

Drilling down, clothing and home sales were down 5.3% in the six-month period, and slipped 5.9% on a like-for-like basis. However, the decline in sales in existing stores slowed from 8.9% in the first quarter to 2.9% in the second.

In the bigger and more successful food business, total sales were up 4% in the half-year, and dropped 0.9% on a like-for-like basis.

Clothing & Home

Despite the wide-ranging overhaul of its business, Rowe says the retailer is making "good progress" on work underway since May to try to turn around the retailer's clothing division by lowering prices and improving style, fit and quality.

Even with a 5.3% decline in total sales, he notes: "We are restoring our price integrity and have seen strong volume improvements, particularly in opening price points, as we ensure we are price competitive."

Fewer promotions to try to drive full price sales meant full price value share was up by over 30bps in the 12 weeks to 25 September, with further improvements in volume share, according to Kantar World Panel data. But the retailer also saw a 20bps decline in overall value share.

Gains from buying and reduced promotions also offset increased currency pressure and higher markdown costs, lifting clothing gross margin up 10bps to 56.7%.

"Product is key to recovering and growing Clothing & Home and we are focused on delivering contemporary wearable style and being famous for quality wardrobe essentials," Rowe adds.

"We now have 10% fewer clothing lines that we have bought with greater authority and we have introduced a more contemporary colour palette for autumn. We also delivered on our commitment to improve the 'fit' of wardrobe essentials and saw strong performances in core areas such as bras and T-shirts."

Improved availability is also making a difference, helping lift school uniform sales by around 10% year-on-year in quarter two.

"We've also changed the layout of our stores to reflect how our customers like to shop, with more of our clothes grouped together in product categories, rather than in brand co-ordinated departments."

International plans

On the international front, M&S will close 53 international stores, including ten in China and seven in France, and exit loss-making markets (Belgium, Estonia, Hungary, Lithuania, the Netherlands, Poland, Romania and Slovakia) as it moves its overseas business to a franchise model. This will incur a charge of GBP150-200m in the next 12 months. 

However, it will continue to operate owned businesses in the Republic of Ireland, Hong Kong and Czech Republic.

M&S says its owned international business delivered a loss of GBP31.5m in 2015/16, and total international operating profits were down 39.6% to GBP55.8m.

The retailer already has 267 franchised stores in 34 markets, which made a profit of GBP87.3m last year. It also has established joint ventures in Greece and India.

"These are tough decisions, but vital to building a future M&S that is simpler, more relevant, multi-channel and focused on delivering sustainable returns," Rowe says.

The latest changes come after M&S in September revealed plans to cut around 525 head office jobs – around 15% of the total – in an attempt to remove duplication, drive accountability and "strip out unnecessary costs" across the business. The company employs over 3,500 people across its seven UK head offices.

M&S to cut 525 HQ jobs in efficiency drive

What the analysts say

Clive Black, analyst at Shore Capital:
"Whilst we cannot be certain of delivery, we feel Mr Rowe is the best chance that M&S has had in a long-time to place the retailer on a better course for shoppers and shareholders' alike. Steve Rowe is dealing with the reality of M&S in a considered but also decisive manner to our minds. We believe that the component parts of his plan have individual and collective merit and as such do prime M&S for a brighter more profitable."

Jamie Merriman, analyst at Bernstein:
Today's results reflect a business in transition. There are clearly some positives here – LFL sales in Clothing & Home were better than we and consensus expected, and the exit from loss making international markets should help improve group profit – but sailing is not smooth…gross margin in C&H will not expand as much as hoped in 2016, and in 2017 currency pressures intensify; store closures in the UK will take time and may not be enough to transform store profitability."

Honor Strachan, lead analyst at Verdict Retail:
"While these are necessary steps, the update seems to be missing a vital element which continues to plague M&S – who is it targeting and where does it want to position itself in the UK clothing market? Removing just three sub-brands does not seem drastic enough to allow it to more effectively target a clear consumer segment.

"Though it has tried to remove shopper confusion about which brands they should shop by displaying clothing in product categories, as well as making steps towards improving availability and slimming down options, these actions seem like band aids for its core issue of not understanding which segment of the market to go after.

"Ultimately M&S's future performance lies on the success of its product offer. Its food proposition is best in class for the segment of the market it operates in, ensuring differentiation and go-to appeal, resulting in market share gains. This strategy has yet to be replicated in non-food, but at this late stage M&S should be willing to take a risk to slim down its offer and target a smaller shopper group with relevant and desirable clothing that is differentiated." 

Jon Copestake, retail analyst at the Economist Intelligence Unit:
"The timing of M&S's decision to close stores abroad is interesting. With sterling so weak and Brexit negotiations not yet underway, M&S could benefit from significant currency headwinds during a period when the single market remains open if foreign stores were to remain open, even it is just until negotiations are concluded.

"Although if such stores are loss making then the weak pound only exacerbates the financial cost involved in keeping them open.

"The decision to consolidate clothing stores and switch strategic focus firmly onto M&S's food offering is long overdue and Rowe can be credited with acting decisively in this respect. Clothing has long weighed on profitability for M&S and the current economic climate is seeing a number of clothing retailers struggle with sales."