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* Says on track to grow non-food profit margins
* Q1 underlying non-food sales fall 0.4 pct
* Q1 underlying food sales up 0.3 pct
* 6 pct of votes cast at AGM oppose Bolland re-election
* Shares fall up to 2.1 pct, up a quarter year-on-year (Adds AGM vote detail, investor comment, updates shares)
By James Davey
LONDON, July 7 (Reuters) - British retailer Marks & Spencer reported a dip in first-quarter underlying sales in itsclothing, shoes and homeware business on Tuesday, a setbackafter a return to growth in the previous three months.
However, the 131-year-old mainstay of Britain's shoppingstreets said it remained on track to grow profit margins thisyear, a key target for its general merchandise business, whileits food business continued to outperform the wider grocerymarket.
Shares in M&S have risen by a quarter over the last year onhopes the billions of pounds spent by Marc Bolland, chiefexecutive since 2010, on revamped products, stores, logisticsand the website will pay off.
But they fell up to 2.1 percent on Tuesday as M&S gave anupdate on trading and then hosted about 700 investors at itsannual meeting at London's Wembley Stadium.
"Whilst it is disappointing that management has not beenable to sustain the positive general merchandise tradingmomentum ... we are reasonably comfortable that the slowdownbroadly reflects slowing market conditions in UK apparel," saidShore Capital analysts, who have a 'buy' rating on the stock.
M&S kept its guidance for the 2015-16 financial year,including growing gross margins in the general merchandisebusiness by 1.5 to 2 percentage points.
Bolland, who saw 6 percent of votes cast at the AGM opposehis re-election as a director, has stressed his non-foodstrategy is primarily to focus on gross margins, the differencebetween the price it buys goods and the price it sells them,through improvements in M&S' sourcing operations, rather thanthrough driving sales growth.
"What we have said very consistently is the priority is ongross margin and we're delivering," he told reporters, repeatinga forecast of flat to modest growth in general merchandise salesfor the full year.
Some analysts, however, remain concerned.
"Increasing gross margins alone is not a source of long-termgrowth," said Credit Suisse analysts, who have an 'underperform'rating on M&S shares and note a firmer U.S. dollar could hurtclothing retailers' margins in future quarters. Many fashionretailers buy goods from factories in Asia, priced in dollars.
M&S said general merchandise sales at stores open over ayear fell 0.4 percent in the 13 weeks to June 27, better thananalysts' average forecast for a 1 percent decline, but below0.7 percent growth in the previous quarter -- the division'sfirst growth in nearly four years.
Bolland said an unseasonally cool May hit the wholeindustry, leading to widespread promotions in June.
Official data, published last month, attributed a sharpslowdown in British retail sales growth in May to shoppersbuying fewer clothes.
Bolland said customers were recognising M&S' moves toimprove the quality and style of its clothing and highlightedgrowth of 38.7 percent at M&S.com, re-launched last year.
But at the investor meeting some did not share his optimism.
"I could weep when I see what's in stores today. Where isthe originality, where is the flair, where is the newness andwhere is the good taste,?" said Mrs Conway, a retired M&Sfashion designer, drawing warm applause.
M&S' food business, which contributes over half of groupsales and about one third of profit, posted a 0.3 percent risein like-for-like sales, a 23rd straight quarterly increase thatwas in line with forecasts.
In May M&S reported a rise in annual profit for the firsttime in four years and analysts are forecasting another increasefor 2015-16.
($1 = 0.6415 pounds) (Editing by Mark Potter and David Evans)
