Among precautionary measures M&S is reducing the supply pipeline by over GBP100m (US$118m)

Among precautionary measures M&S is reducing the supply pipeline by over GBP100m (US$118m)

Marks & Spencer (M&S) has warned trading over the next nine to 12 months in its clothing and homewares business is likely to be severely impacted by the coronavirus (Covid-19) outbreak and that it is "taking all possible steps" to defer supply ahead of what it expects to be a prolonged downturn in demand.

In an update today (20 March) the retailer said that while its food business has so far remained strong as customers stock up, it is seeing substantial sales declines in clothing and home "and we have to manage our costs accordingly."

It adds: "We are preparing for the contingency that some stores may have to close temporarily. However, our business model of operating parallel clothing and food businesses and our strategy to move online including the Ocado joint venture should provide more resilience than some single sector businesses." Among its plans are redeploying significant numbers of workers to support the food business.

"There will be a substantial impact on clothing and home revenue at the very least in the first 3-4 months of the next financial year. Although it is possible that this may ease as we get into summer trading, margins are likely to be severely impacted by the surplus of unsold seasonal stock and probable clearance activity in the marketplace.

"We are therefore taking all possible steps to defer supply. However, a very large part of our core business is less seasonal year-round essential product and this should provide some scope for carrying forward stock. At this stage we are not assuming a return to normal trading in the autumn."

Included among precautionary measures in its clothing business are "reducing the supply pipeline by over GBP100m (US$118m) and holding over stock. With around two thirds of our clothing inventory 'core' product we will take extraordinary measures to hold over inventory."

M&S added that it is already the UK's second largest online clothing business and the largest in many essential product categories, "so will use this opportunity to increase our online penetration."

The retailer also expects to take a hit in its international business, as sales are adversely affected by local outbreaks of the virus and in some cases lockdown and closures. "We further anticipate some additional Brexit related costs impacting our French and Irish businesses starting at the end of the year," it added. 

Looking ahead, the retailer suggests pre-tax profit could fall below expectations of GBP440 to GBP460m.

It is also too early to make any "reasonable" forecast for revenues in the next financial year, which begins next month, but M&S is planning on the basis of a prolonged downturn in demand for clothing and home.

What the analysts say

Clive Black, analyst at Shore Capital, notes: "Whilst we all live in uncertain times, which is having quite remarkably extensive implications for the British economy and its component parts, we believe that M&S is a liquid and solvent business that it will be trading through the present crisis and thereafter; it is arguably much more liquid than Next, which stated the necessity to mitigate solvency challenges yesterday. The steps that M&S is taking are, like those of others, tough but the responsible and necessary in their own right. Hence, we support them."

M&S is expected to release FY2020 preliminary results on 20 May.

Rival Next Plc yesterday warned it could lose up to GBP1bn (US$1.15bn) in sales as the coronavirus impacts demand, with CEO Lord Simon Wolfson noting: "People do not buy a new outfit to stay at home."

Click here for additional insight on the coronavirus outbreak: Is coronavirus a threat to the clothing industry?