Marks & Spencer this morning (8 January) revealed a “difficult quarter” for general merchandise, with sales down 5.4% and like-for-like sales down 5.8%. One analyst believes that while M&S’s strategy of becoming more fashion focused is generally sound, it still has some way to go before it fully wins the confidence of consumers. Here are analysts’ views of today’s results.
Conlumino managing director Neil Saunders:
“When it last updated the market back in November, M&S’s numbers were showing some signs of improvement. Unfortunately, this dismal set of figures indicates this momentum has not been carried through into the Christmas quarter. Even more discouraging is the fact that the progress from Christmas 2013, when M&S presented a fairly sound set of trading numbers, has not been built upon.
“On the clothing front, we believe that M&S’s strategy of becoming more fashion focused is generally sound. New collections, including those in place over the Christmas period, had some strong pieces and, generally, looked good – especially in larger stores. However, it is fair to say that the rejuvenation of M&S’s clothing offer is at a relatively early stage and it has not yet completely won back the confidence of consumers. This means that performance can easily be blown off course by negative headwinds; and the gusts certainly blew this Christmas.
On fashion, the negative influences over the festive period were threefold; two of them affected all clothing players, while the other one was particular to M&S.”
Investec analyst Kate Calvert:
“General merchandise FY gross margin guidance of +150-200bps was retained. Sales were expected to be down given the less promotional strategy and warm weather, but December’s distribution impact on online is visible as Castle Donington struggled to cope with Black Friday volumes. Online sales were -5.9% (Q2 -4.6%). Consumer confidence in using M&S.com was dented despite its delivery cut off pre-Christmas being two days later this year. Encouragingly, online sales turned positive in October and November, which shows that customers are getting used to the website.”
Cantor analyst Freddie George:
“Although we believe that at last there have been some visible improvements and more consistency with the womenswear ranges, we still have a number of concerns. The initiatives relating to the supply chain and IT address under investment from the past and bring the infrastructure up to the standards of international peers, but will not, we believe, lead to a significant increase in sales or profits over the medium term. Debt levels remain over GBP2bn and the company has a pension deficit to fund, which will likely limit the potential for accelerated dividend payouts. In the meantime, the stock is rated at 14.8x FY15 forecast earnings. It has risen by over 15% since the interim results in November and is now broadly on a similar rating to Next based on earnings.”
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By GlobalDataRetail Remedy director of the retail consultancy Phil Dorrell:
“However many luxury mince pies and champagne it shifts, M&S’s food sales cannot mask its increasingly dire clothing sales figures.
“The 40-something customer that M&S seeks to attract is far more fashion conscious than the brand gives them credit for – and the reality is most of them don’t want to be shopping in a store that seems to be catering for ages 40 to 140.
“The improved margin on clothes is a sound long-term aim, but Marks remains a volume retailer and not a boutique. It simply cannot allow sales to fall at the current rate. A 5.3% like-for-like fall in clothing sales is woeful compared to the success of its high street rivals, and unforgivable given the length of time it has been working on a turnaround strategy.”
Bernstein Research analyst Jamie Merriman:
“M&S.com sales were down 5.9% in the quarter, well below management’s previous guidance that the e-commerce business would be in growth ahead of peak. Though the business was in growth in October and November, issues at Castle Donington in December derailed this performance for the quarter. Although management did not provide detail about the source of the problems in the Castle Donington distribution centre, they did suggest that they “have already made progress in addressing this”. Management also suggested that they have now returned to the promised improved delivery proposition. We expect investors may be skeptical that e-commerce execution will be flawless from here.
“However, on a more positive note, M&S resisted promotional pressure and has maintained gross margin guidance for the division. This suggests that as we expected, M&S is choosing to prioritise gross margin expansion over LFL sales growth. While we believe this is what investors want in the long run, striking the balance of only modest LFL declines and gross margin expansion seems to have proved difficult this quarter.”
Euromonitor International research analyst Philip Benton:
“Marc Bolland started a radical restructuring of M&S’s apparel operations in 2014 with the promise to directly source 60% of its clothing by 2017. We saw the beginnings of this strategy start to take shape in November 2014 as Bolland announced they had increased their internal sourcing from 20% to 25%, with 35% expected by the end of 2014. With more control over direct design and manufacturing, it will allow M&S to respond quicker to consumer demands and improve speed and efficiency in their supply chain.
“However, M&S has been slow to embrace the potential of online shopping, with Euromonitor International estimating the online apparel and footwear market to be worth over GBP9bn in 2014, and despite overhauling their transactional website and mobile shopping app which has acted as a persuasive tool for consumers and helped to increase traffic considerably. M&S must learn from the fiasco of the delayed ‘Black Friday’ deliveries and embrace a true omni-channel strategy akin to John Lewis and Next if they are able to seriously compete as an online retailer.”
