M&S Earnings Tumble, Profit Warning Rattles Investors
Shares down 8% in morning London trading
Shares plunged 8% in morning trading in London as the British retailer said difficult conditions in the U.K. and abroad, coupled with its decision to cut prices and reduce promotions “will have an adverse impact on profit in the short term.”
Marks & Spencer’s pretax profit fell to £488.8 million ($708.57 million) in the 53 weeks ended April 2 from £600 million in the same period a year earlier, with the company taking a series of charges which offset modest growth in revenue and a stronger performance at its food stores.
Steve Rowe, who took the reins of M&S last month faces the task of turning around M&S’s Clothing and Home sales, which have struggled for a string of quarters, while continuing to grow its food arm.
Chairman Robert Swannell said on Wednesday that Mr. Rowe’s “number one priority is to restore our Clothing & Home business to profitable growth, while maintaining the pace of growth and success of our market-leading Food business.”
“We think this plan addresses some of the key issues facing M&S and should help improve the competitiveness of the general merchandise business,” said RBC analyst Richard Chamberlain.
Under former chief executive Marc Bolland, M&S made a series of management changes in the womenswear, lingerie and beauty businesses last autumn and more recently has been reducing prices of certain core products. The moves have yet to lift the division’s sales and Mr. Rowe on Wednesday acknowledged the results were “not satisfactory.”
Profit, before tax and these exceptional items, rose 4.3% to £689.6 million on a 2.4% rise in revenue to £10.56 billion.
M&S, one of the U.K.’s best-known retailing names which began life as a market stall in 1884, saw operating profit plunge 40% in its international arm as it struggled with its fully owned businesses, particularly in Western Europe. The company said it absorbed the costs of a weaker euro rather than passing these along to customers, which also hit profits.
M&S warned that it sees “further pressure from the euro exchange rate, as well as weak trading conditions in Western Europe,” adding “the macroeconomic backdrop in most of our franchise markets isn't improving.”
The company reported its gross margin in Clothing and Home was up by 2.45 percentage points as it continued to benefit from more efficient sourcing. That helped the U.K.’s gross margin climb by 0.75 percentage point.
Like-for-like sales in food edged up by 0.2%, but dropped 2.9% in Clothing and Home. International like-for-like sales rose 1.3%, while in the U.K. they fell 1.1%.
M&S identified several areas it said needed “further consideration,” including its international business, its U.K. store base and its organization. It said it would update investors on these in the autumn.
The company expects a similar sales trend in the current fiscal year as the previous one. “M&S appears to have set the bar low on revenue guidance,” said Mr. Chamberlain.
It guided to a 0.50 to 1 percentage point increase in its Clothing and Home arm’s gross margin and said its food business’s margins would stay flat.
Write to Saabira Chaudhuri at firstname.lastname@example.org and Tapan Panchal at Tapan.Panchal@wsj.com