April 10, 2014 1:43 pm

Marks and Spencer: dressing up

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Sign of light at the end of the tunnel for UK retailer

A frisson of excitement from Marks and Spencer on Thursday: its shares jumped in early trading on signs that – just maybe – the retailer’s longstanding problems in clothing were coming to an end. Like-for-like clothing sales were up 0.6 per cent in the three months to March. A small increase, perhaps, but it is better than a fall. But the excitement didn’t last long. A tough market for homewares dragged the overall non-food performance back, and margins in that part of the business are falling.

So unless the clothing business can turn this tiny bit of momentum into a huge rolling wave, the non-food part of M&S will continue to struggle. The investment case for M&S – or at least the case for arguing it no longer deserves its 23 per cent price-to-earnings discount to the rest of the UK general retail sector – rests on the belief that the food and international businesses can make up for the weakness elsewhere.

The upmarket food offering is pulling its weight. Flat like-for-like sales in the quarter are creditable in a market enduring a price war. Not only that, but gross margins in food are better than expected. Consumers, it seems, will go a long way to get a penny off milk, but are less price-sensitive when it comes to maple-cured gammon shanks with cranberry and orange sauce. International sales are also growing nicely. This month M&S revealed plans to increase its international estate by 250 stores to about 700.

So there are reasons to be optimistic. But in recent years progress in food and international businesses has not made up for weakness in non-food. M&S is expected to report annual net profits of £510m next month – three years ago it made £600m. And over the past year profit expectations have been cut by about a tenth. A decent quarter for clothing sales does not necessarily signal the end of that trend.

Email the Lex team in confidence at lex@ft.com

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