Underlying profits at M&S drop for third year

Marks and Spencer reported better than expected full-year profit, but warned that teething troubles with its new £150m website would take their toll on sales.

The UK retailer said underlying pre-tax profit was £623m in the year to March, compared with £665.2m for the same period a year earlier – the third consecutive year of decline, but ahead of analysts’ expectations of £615m.

Marc Bolland, chief executive, who is striving to transform M&S into an international, multichannel retailer, also warned on Tuesday that it would take four to six months for its revamped website to “settle in”, which would affect sales of clothing and homewares in the first quarter.

Three people familiar with the situation have said that M&S has seen sales slow sharply since it relaunched its website in February, after a £150m makeover that saw it move from a platform run by Amazon to one controlled by M&S.

Morgan Stanley, joint broker to M&S, said: “We understand that online sales, which had been growing about 25 per cent year-on-year, are currently showing little, if any, growth as customers get used to the new site.”

Analysts at Citi, also joint broker to M&S, said the likely website disruption was one of the factors that would prompt an expected 4 per cent cut in forecasts of pre-tax profit this year to £670m.

Alan Stewart, M&S finance director, insisted that the online performance was in line with plans to deliberately slow the marketing of the new site until customers were comfortable with it, so holding back sales growth.

“Nothing has gone wrong,” he insisted. However, he added: “We are six weeks away from announcing our first-quarter numbers. It takes four to six months to settle in. It will have an impact on the first quarter.”

Mr Bolland also denied that M&S was suffering from problems at the Castle Donnington warehouse, which supports its online operation.

However, Tony Shiret, analyst at Espirito Santo, said the online setback was “worrying” now that it accounted for 16 per cent of general merchandise sales.

Morgan Stanley said the online disruption could shave 0.5 percentage points off of general merchandise sales from stores open at least a year in the first quarter.

M&S also said it would not go ahead with its plans to build a distribution centre at the London Gateway port complex because it could not be built in time. That will save £130m.

Sales rose 2.7 per cent to £10.3bn, but this is still below the target of between £10.8bn and £11.5bn, set two years ago.

Statutory pre-tax profit rose 6.1 per cent to £580m.

Mr Bolland, who has reached the end of a three-year strategic blueprint, has pledged to cut capital expenditure by £800m-£825m in each of the past three years to between £500m and £550m in each of the next three.

He said the “heavy lifting” was now done, and the retailer would focus on increasing the “gross margin” – the difference between the price at which it buys and sells goods – in clothing and homewares by 100 basis points this year. Mr Stewart said three-quarters of this would come from improvements in the way M&S bought in goods.

The gross margin fell by 110 basis points in the year to March, compared with expectations at the start of the year of a 30-50 basis point increase.

M&S also raised the possibility of returning cash to shareholders, although Mr Bolland did not put a timeframe on this.

The comments come as M&S has been striving to improve its clothing business, particularly womenswear. Market share data from Kantar Worldpanel, seen by the FT, indicated that womenswear was showing some signs of improvement, although menswear sales suffered a backwards step in the 12 weeks to April 13.

A final dividend of 10.8p makes an unchanged total for the year of 17p, payable from earnings per share of 31.9p (31.6p).

The shares fell 2.62 per cent in early trade to 438.89p.