Broker snap: M&S update 'disappointing' as clothing underperforms, says Numis

Numis Securities has scaled back its profit forecasts for Marks & Spencer (M&S) after the High Street retailer missed expectations in its third quarter.M&S managed to impress the market, with shares rising 3.35% to 459.8p in morning trade, but Numis wasn't convinced, labelling it as "another disappointing update" with the General Merchandise (GM) division continuing to underperform.The broker maintained a 'hold' rating and 450p target price for the stock.Group sales rose by 1.8% in the 13 weeks to December 28th, the firm said. However, while total UK sales increased by 1.5%, they were down by 0.2% on a like-for-like (LFL) basis."Q3 LFLs have come in light of consensus, already lowered since mid-December," said analysts Andrew Wade and Matthew Taylor.They said that GM LFL sales were "particularly disappointing", falling by 2.1%, which compared with consensus forecast for no change and Numis's forecast for a 0.5% decline. Meanwhile, Food LFL sales were also shy of expectations, rising by just 1.6%, below forecasts (consensus and Numis') for a 2% gain.M&S said that full-year Food gross margins would be ahead of previous guidance of a 50 to 60 basis-point improvement, but promotional activity means that GM margins would fall would 30 to 50 basis points. This would work out to full-year UK gross margins being broadly flat year-on-year."It seems that, having attempted to operate at full price through early Q3, in line with strategy, the business capitulated in the face of a warmer October and never recovered," Numis said.The broker has lowered its pre-tax profit forecast for the year ending March 2014 to £628m, which leaves the stock trading at around 15 times earnings."With capex set to normalise from 2014/15 as the bulk of the infrastructure investment reaches its conclusion, the shares look inexpensive from a forward cash flow perspective but, now having posted 10 consecutive quarters of negative GM LFLs, we remain unconvinced by the crucial piece of the jigsaw - the improvement in trading trend in the GM division."BC