23rd May 2018 11:35
LONDON (Alliance News) - FTSE 100-listed Marks & Spencer PLC said on Wednesday that profit slumped in its recently ended financial year, as it works to rectify "a number of structural issues".
However, shares in M&S were up 4.5% at 304.90 pence on Wednesday, having hit a high of 311.00p earlier in the session. The stock closed down 2.9% on Tuesday.
"A sharp jump in Marks & Spencer's shares this morning means that the retailer got its news management right, by releasing the details of big store closures ahead of its results, but the numbers themselves are nothing to be proud of and show just how much work there is still to be done," said Russ Mould, investment director at AJ Bell.
Revenue rose 0.7% to GBP10.70 billion for the year to March 31, up from GBP10.62 billion last year, but pretax profit dropped 62% to GBP66.8 million from GBP176.4 million.
Adjusted pretax profit still fell 5.4% to GBP580.9 million, hit by a decrease in its Food gross margin, which fell "more than expected" by 140 basis points during the year. Nonetheless, adjusted profit came in slightly higher than the GBP573.0 million consensus figure.
One-off costs came in at GBP514.1 million for the year, up from GBP437.4 million last year. This includes GBP321.1 million related to the UK store estate, up from GBP51.6 million the year before - as it accelerated "transformation plans" - with a GBP15.5 million cost related to its IT restructure.
"For management to claim these costs are 'exceptional' now looks a little rich, given that this is the third year in a row they have occurred, after the GBP200 million in so-called exceptionals in 2016 [..] M&S has now taken 'exceptional' charges in each of the last seven years at total cost to the profit and loss account – and thus shareholders – of GBP1.4 billion," said AJ Bell's Mould.
Further to the GBP321.1 million charge, M&S said it expects further accounting costs of up to GBP150 million as it completes its store transformation programme, and continues to expect the cash costs of the programme to be GBP200 million.
News of these store costs comes just a day after M&S said it will scale back its food store opening programme and will now open 15 fewer stores than planned in the year ahead. The company also plans to close 14 Clothing & Home stores in its recently-commenced financial year.
"Until recently the food business was the bright spark which kept hopes for growth from M&S alive, but now that seems to have dimmed too," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"The growth in home delivery for food is not a friendly trend for M&S, where 40% of customers shop for their dinner on the same day. Margins have also been squeezed by a weaker pound pushing up the cost of stocking the shelves with goods," Khalaf added.
Food revenue grew 3.9% in the year - though like-for-like sales slipped 0.3% - while Clothing & Home revenue fell 1.4% and was down 1.9% on a like-for-like basis.
M&S said that Food's performance in key events was strong, the everyday performance was "poor". Operationally, M&S said it will reposition the Food business in the year ahead to become more "relevant".
Clothing & Home gross margin was up 50 basis points year-on-year, in line with expectations, and full-price sales steady.
M&S said it put around 8% less stock into sale across the year, as a result of its planned removal of two clearance sales. However, challenging trading conditions in the second half resulted in an "increased depth" of cut.
UK costs were up 1.8% in the period due to costs relating to new space, inflation and channel shift. This was partially offset by efficiencies and lower incentive costs.
"There are a number of structural issues to address and we are taking steps towards fixing these. The new organisation will largely be in place by July and the team is now tackling transforming our culture to make M&S a faster, lower cost, more commercial, more digital business," said Chief Executive Steve Rowe.
The food, clothing and homewares retailer maintained its full-year dividend at 18.7p.
AJ Bell's Mould noted this equates to a dividend yield of around 6% - the twelfth highest yield in the FTSE 100 based on ordinary dividends.
"So patient holders may resist the temptation to throw in their M&S Homeware towel, at least for now," he commented.
Looking further into its "structural issues", M&S said that although online sales are growing, its online capability is "behind the best of our competitors and our website is too slow".
Under a section of its statement titled "Facing Facts", the retailer continued: "Our fulfilment centre at Castle Donington has struggled to cope with peak demand and some of our systems are dated. In both businesses we need to revitalise our ranges and reassert our reputation for value for money."
M&S.com revenue increased by 5.2% at constant currency during the year.
Rowe said the first phase of M&S's transformation plan - "restoring the basics" - is now well underway, with the actions taken thus far having boosted the "velocity of change".
However, the M&S boss highlighted that these changes come with costs, which were reflected in Wednesday's results.
The company is looking to improve its website, as well as investing to increase and improve e-commerce capacity, to support its ambition of doubling the online share of its Clothing & Home sales to over 33%.
M&S said it is taking steps to recover its appeal to "family-age" customers in Clothing & Home, reducing the number of lines and phases, buying "more stylish" products and emphasising value.
Looking to the year ahead, M&S said it expects Clothing & Home gross margin to be flat to up to 50 basis points higher, "with the first half of the year adversely affected by currency and sale timing". Food gross margin is expected to decrease by as much as 50 basis points.
UK costs are set to decrease by up to 1%, while capital expenditure is expected to total between GBP350 million to GBP400 million.
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