Blog: Leonie BarrieCost cuts no surprise at M&S

Leonie Barrie | 7 January 2009

M&S has long been under pressure to slash costs, so this-morning’s announcement of store cuts and redundancies has largely been welcomed by analysts.

The retailer is looking at operating cost growth for its current financial year to be towards the lower end of its 4-5% guidance, while for next year UK capital expenditure could be down by up to GBP200m.

The store closures and reduction in head office staff shouldn’t have come as a surprise either, especially after the retailer slashed the redundancy terms for its staff last September. The following month it also began a cull of staff in its store design, development and property teams.

But even though Marks & Spencer narrowly avoided a worse than expected drop in sales during the Christmas period, its policy of cutting prices to drive sales and help preserve market share will lead to an expected 1.75 percentage point decline in full-year gross margins.

Quizzed by analysts today, chairman Sir Stuart Rose also admitted that a further threat to margins is looming in the form of higher costs caused by the sharp devaluation of sterling. “There’s a difficult margin situation coming up in autumn with regards to currency,” he said, referring to an estimated 20% currency-related increase in the cost of clothing made overseas.

“We hope to mitigate this through better sourcing, more consolidation and a drop in raw materials prices going forward,” he added, but the difficult choice that lies ahead is whether to absorb this effective cost increase and take a further hit on profits, pass it on to consumers, or more likely, suppliers.

 


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