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LONDON (Alliance News) - Marks and Spencer Group PLC Wednesday reported a slight dip in its first-half pretax profit, after seeing a slowdown in food sales growth in the second quarter and citing a warm autumn in the UK as the reason for weaker clothing sales.
But the high-street retailer said its gross margins in the UK held up well in the period, especially in its struggling general merchandise business, and it delivered its first rise in underlying pretax profit for four years.
M&S shares shot to the top of the FTSE 100 Wednesday, as its interim profit came in better than analysts expected, while gross margin improvements in its general merchandise arm surprised on the upside. M&S shares were trading 8.0% higher Wednesday morning at 437.00 pence.
M&S said total UK sales were flat in the second quarter, and declined by 1.7% on a like-for-like basis, on the back of weaker sales of clothing and general merchandise and slower sales growth from its normally robust food business. UK sales of general merchandise, including clothing, were down 3.6% year-on-year in the quarter and declined 4% on a like-for-like basis. Clothing and footwear sales on their own were down 3.0% in the quarter and down 3.4% on a like-for-like basis.
UK food sales growth slowed to 3% in the quarter year on year, and on a like-for-like basis inched up only 0.2%.
September is a big month for M&S, as it transitions to its Autumn clothing collection and it benefits from a surge of back-to-school sales, as parents buy their kids school uniforms and other outfits ahead of the start of term.
However, M&S said Wednesday that warmer than usual weather during September held back UK clothing sales, estimating that unseasonally warm weather in September wiped around 2.5% off its general merchandise and clothing sales in the second quarter, and around 1.3% for the first-half as a whole.
"Performance was impacted by unseasonal trading conditions in September which affected sales of Autumn/Winter ranges," M&S said.
Chief Executive Marc Bolland said that October trading has not fared much better.
"October has been nearly equally unseasonal, but slightly better," Bolland told journalists Wednesday.
Internationally, sales fell into negative territory in the quarter, down 1.9%, with M&S citing currency headwinds and unseasonal conditions across Europe, as well as political issues in the Middle East, Russia and lower shipments. International sales were up 1.2% for the first-half as a whole.
M&S's online business pared back some of the decline it experienced at the start of the year and was down 4.6% in the second quarter, compared to a decline of 8.1% in the first quarter. The M&S website has been held back by the transition to a new website platform, and management have previously guided to a "settling in" period of around six months for the new site, meaning company management need to show investors a strong turnaround in online sales in the second half on the financial year.
"We clearly stated in February that this will take roughly six months. We have said that although there was a minus over the half year, it was an improving trend, and the exit rate was already near flat, so we are now moving towards growth. People are liking the site more and more," said Bolland.
"Signs are positive if we look at the trends of womenswear, which is a positive indication. The fact that we improved our gross margin and cash, I would certainly say those signs are encouraging, but what we planned for," Bolland added.
M&S is starting to see glimmers of hope for its clothing range, which has struggled to impress shoppers for years.
"Out emphasis on quality and style is working. We are seeing strong demand for what we call higher quality and higher style, products like cashmere.... People are telling us that M&S has got its style back," Bolland told journalists Wednesday.
M&S reported a 1% increase in first-half revenue for the 26 weeks to September 27, to GBP4.90 billion, up from GBP4.88 billion the prior year.
Its underlying pretax profit, which strips out costs such as provisions and restructuring costs, was up 2.3% on a constant currency basis to GBP267.6 million, compared with GBP261.6 million a year earlier, buoyed by an improvement in margins, up 150 basis points in its general merchandise business, on the back of less discounting, and up 25 basis points in food.
"M&S delivered sales growth and increased profit in the first half despite a tough market, particularly in September," said Bolland.
M&S's reported pretax profit, however, dipped slightly to GBP279.4 million, down from GBP280.6 million the prior year.
"Higher gross margin and lower-than-previously-guided cost growth will deliver strong full-year cash generation, building on the increase in free cash flow last year," the company said.
The retailer said it used part of that increased cash flow to raise its interim dividend by 3.2% to 6.4 pence. M&S said improvements in its gross margin was down to better sourcing and buying.
"A large part of gross margin improvement is coming from better sourcing. Better discounting is also part of it. If we look at Christmas, we can do two things...if we look at our capex guidance we can be competitive to customers, and improve our gross margin," Bolland told journalists.
M&S has guided for a capital expenditure spend of between GBP500 million and GBP600 million for the full year.
On the back of better-than-expected gross margin improvement in general merchandise, M&S raised its guidance for the full year to between 150 basis points and 200 basis points in gross margin improvement. UK gross margin was up 50 basis points to 41.8% in the first half, driven by a strong improvement in General Merchandise margin, which rose 150 basis point to 53.7%. Food gross margin was up 25 basis points to 32.7%
M&S also lowered its guidance for its increase in operating costs for the full year to 3.5%, from 4%, citing better cost control and a tight lid on capex.
However, M&S said it is accelerating its Simply Food store openings to 200 over the next three years, from the 150 planned prior.
M&S remained cautious in its outlook for the remainder of the year, citing that although its seen improvements in consumer confidence, market conditions continue to be challenging, although it said it's confident it is "well set up" for the key Christmas trading period, despite the risk of a repeat promotional festive period from retailers like last year.
"The food market is down and with the unseasonal weather over last two months, that is why we are cautious," said Bolland.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
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