There was little Christmas cheer at M&S yesterday (9 January) after the retailer posted its worst quarterly results in more than two years. But are the figures symptomatic of problems at M&S specifically, or simply evidence that the UK retail boom is well and truly over?

For more than two years UK retailer Marks & Spencer (M&S) has been on a seemingly unstoppable trajectory, with nine consecutive quarters of like-for-like sales growth propelling it towards a milestone GBP1bn pre-tax profit in its current financial year. 

But all this came to an abrupt halt yesterday (9 January) when the company revealed a 2.2% slump in third quarter like-for-like sales in the 13 weeks to 29 December - and warned that tough trading conditions are likely to persist in 2008 and even into 2009.

Figures published by the British Retail Consortium (BRC) earlier this week seem to support comments by M&S chief executive Sir Stuart Rose, who said market conditions "became more challenging through November and December."

The BRC said retailers saw their worst Christmas in three years, with like-for-like sales in the three months to December edging up just 0.8%. It also suggested more bad news is in the pipeline as previous hikes in interest rates have yet to be felt by many households.

Below expectations
However, of concern to analysts is the fact that despite its GBP1bn store refurbishment plan and its high profile advertising campaign, M&S' sales figures still came in below expectations.

They also lag behind results released in recent days by some of its main retail rivals, including supermarket group J Sainsbury which today (10 January) revealed better-than-expected Christmas sales figures with clothing among the main drivers.

Similarly, like-for-like sales at department store group John Lewis were up 6.2% in the five weeks to 5 January, with cashmere and women's accessories such as handbags among the leaders.

In general merchandise, which includes clothing and footwear, like-for-like sales at M&S slipped by 3.2% - well below the market average. And while overall group sales rose by 2.8% in the quarter, with UK sales up 2%, demand for clothing was down by 1.2%.

Analysts have reacted to the results by slashing M&S profit forecasts by 7-9% for the current year, and by up to 20% for 2008-09 - describing the latest numbers as "dreadful" and "shocking."

Change of strategy?
But does this mean it is time for M&S to consider a change of strategy?

Sir Stuart is adamant that the results hide a number of positives for the retailer, which will help it to weather the trading storm of the next 12 months.

"We did not discount in the run up to Christmas. Stock levels were well controlled over the period. We had a strong start to the Christmas Sale and sale stocks have now cleared." This, analysts say, will help gross margin.

He also added that the quarter generated "the biggest single volume increase the business has seen for six years," and that it "sold more goods to more people than we did last year."

Online sales were up 78%, "reflecting further growth in customer numbers, transactions and conversion. International also performed well with sales up 15.1% over the period."

And he points to tough comparisons with Christmas 2006, when like-for-like sales were up 5.6% in the third quarter, and clothing sales grew by 9.2%.

Product, service focus
M&S' recovery under Sir Stuart, who took the helm of the UK's largest clothing retailer four years ago, has focused on a combination of product, service and the environment.

Footfall has been driven, and market share maintained, in part by lowering prices (down 6% in the third quarter) and offering better value - although this has more than offset the volume gains since more customers now pay less for their clothes.

There were deep cuts in the price of top end cashmere in the third quarter, which was reduced from GBP69 to GBP49, but while this means the company sold more of the garments, "you have to run very hard" to make up for the fall," Sir Stuart points out.

With a broad range of consumers who range from the "financially challenged to the aspirational," M&S has had to lower opening price points 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.

The company has also embarked on an ambitious - and costly - store refurbishment programme, and now has 70% of its 520 stores in the new modernised format.

But despite the high price tag, Sir Stuart believes this is money well spent since it makes M&S stores "attractive places to go" as the market slowdown takes hold.

He is adamant that the company intends to stick with its stated strategy - "we still believe that quality, value, service, innovation and trust are what people want" - and that it will continue to refurbish its stores and open internationally in markets like China and India.

Tellingly, Sir Stuart believes British retailers in general are facing a "real crunch" as their costs, such as fuel and energy bills, continue to rise, but weak consumer spending means they are unable to lift prices.

But the real fear is that M&S has backed itself into a corner where there is little hope of escape - in the short term at least - as the extra cost of opening new space, coupled with a downward trend on prices, continues to hammer margins and erode market share.

By Leonie Barrie.