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* New CEO Steve Rowe to give strategy update on May 25
* Could flag more price cuts and quality improvements
* 2015-16 pretax profit forecast to rise 2 percent
* Forecasts for 2016-17, 2017-18 seen under pressure
By James Davey
LONDON, May 19 (Reuters) - The new boss of British retailerMarks & Spencer will deliver some uncomfortable truthsto investors next week: turning around its clothing businesswill require yet more costly change and could squeeze short-termprofits.
Chief Executive Steve Rowe will set out his strategy toshareholders on May 25, almost two months after he replaced MarcBolland at the top of the 132-year-old firm, a UK institutionthat has fallen out of fashion over the last decade.
For generations, M&S dressed British shoppers of all ages.But the advent of fast, cheap fashion at one end of the marketand affordable luxury at the other - combined with fierce onlinecompetition - has left it struggling to return to its glorydays.
Company veteran Rowe, 48, must convince investors he canlure shoppers back to its clothes - part of its flagship generalmerchandise division - and make progress in matching the successenjoyed by its upmarket food business.
"The general merchandise business has struggled for years togain any momentum so we'll be looking to see the extent to whichRowe can turn that around and how credible the strategy is,"said Simon Gergel, chief investment officer for UK equities atAllianz Global Investors, one of M&S's top-40 shareholders.
"We've had lots of false dawns from this company."
Rowe's plan is likely to involve more price cuts andimproving the quality of clothes, according to analysts, whilehe could reduce the number of the retailer's fashion brands,which include Autograph, Limited, Per Una and Indigo.
With an increasing number of goods sold online, the CEOcould also kick off a review of M&S's use of store space,including how much space should be devoted to food and toclothing, and its nearly 900 locations and office requirements.
M&S declined to comment for this story.
Londoner Rowe has promised a straight-talking approach toarguably the most prestigious and high-profile job in UK retail.His message will be that he can fix general merchandise -clothing, shoes, accessories and homeware - but it won't comecheap and investors will have to be patient, particularly as UKconsumer confidence appears to be waning.
The division accounts for around two-thirds of group profit,so its success or failure will determine his own fortune as CEOof a company where he has worked for over half his life.
"This business needs to go through quite significant changeand there will be some pain attached to that," a person withknowledge of the situation told Reuters on condition ofanonymity.
"Because of the type of pain we've got to put ourselvesthrough there will be costs associated with that. That willaffect profitability for a short term."
MORE SURGERY
Dutchman Bolland addressed decades of under-investment byspending billions of pounds on supply-chain logistics and a newwebsite during his six years in charge.
But while the food business outperformed the market, hefailed to deliver a sustained rise in clothing sales toaccompany the profit margin gains he did achieve. Shares in M&Shave fallen by about a quarter over the past year.
Though his investment means M&S is through the really bigcapital expenditure projects, more surgery is required and thatwould involve additional costs. If those are not offset bysavings elsewhere, profit will be dented.
A survey by analysts at RBC Capital Markets of 18 Britishmass-market clothing retailers found M&S' lowest - or entry -prices were around 20 percent above the average.
Rowe has already cut the prices of 315 spring clothing linesby 10-15 percent and seen sales volumes rise as a result, but herecognises M&S has further to go. Continuing improvements to theway the firm sources products, which have helped to lift thegross margin, should soften the blow from any further pricecuts.
"There's a balance between gross margin, pricing, promotionsand making sure we've got absolutely competitive values in thehigh street," Rowe told reporters last month.
While fourth-quarter clothing sales fell year-on-year, theyshowed an improvement from the previous quarter.
Rowe also needs to push through more improvements to productavailability, so M&S doesn't run out of popular ranges andsizes, while its customer service - once acclaimed - now lagsthat of rivals, analysts say. But all these changes come with acost.
Rowe, who ran M&S's food business before taking charge ofthe clothing and homeware division last July, is keen to boostcross-selling between the two sides of the business. That taskwill he helped by mining data from the Sparks loyalty card,which since its October launch has signed up 4 million members.
The CEO wants M&S to be a simpler, more agile, business andhas already streamlined his top management team with moreconcentrated responsibility and accountability.
"Removing additional layers of bureaucracy should go a longway to helping the business become more dynamic," ColumbiaThreadneedle Investments, M&S's sixth-largest shareholder with2.9 percent of its equity, told Reuters.
Analysts say some of M&S's more marginal overseas divisions,such as its loss-making business in China, could also be closed.
LOST GROUND
Though M&S remains Britain's biggest clothing and footwearretailer by value of sales, with a market share of just over 10percent, it has struggled to compete with the fast fashion ofZara and Primark, and lost ground totraditional rivals like Next and John Lewis.
At the same time supermarkets Tesco, Sainsbury's and Asda have all raised their clothing game.
The results for M&S's 2015-16 year will also be announced onMay 25. Analysts are on average forecasting a 2 percent rise ingroup pretax profit of 673 million pounds ($983 million) - asecond straight year of profit growth following three years ofdecline.
For the 2016-17 and 2017-2018 years, the company-compiledanalyst consensus profit forecast currently stands at 710 and744 million pounds respectively.
Some analysts expect Rowe to downgrade those expectationswith the promise of sustainable earnings growth from 2018. M&S'sdividend is seen as safe but some think a share-buybackprogramme started by Bolland will be put on hold.
M&S' capital expenditure has been on a downward trajectory.
"Confirmation that there will not be another wave ofinvestment capex will be taken positively," said ColumbiaThreadneedle.
"There are still a lot of operational improvements which canbe made in the general merchandise division and we'd hope thatRowe will take the necessary decisions to push the businessforward."
($1 = 0.6844 pounds) (Editing by Kate Holton and Pravin Char)
