Brokers applaud M&S performance

High street stalwart Marks & Spencer saw a sharp drop in like-for-like sales of clothes and other non-food items in the 13 weeks to 2 April, though the fall wasn't as severe as expected and overall sales growth was maintained. The market had been bracing itself for a 6.2% year on year fall in like for like (LFL) sales of general merchandise, but the fall was a relatively tolerable 3.9%. "The headline figure is the general merchandise LFL sales number, with a decline of -3.9% something of a triumph given that the range was -4% to -8%, consensus was -6.2% and the house broker was on -7.0%," notes Tom Gadsby, an analyst at Matrix Group.General merchandise sales were down by 3.4% from the same period last year, which was not as bad as some analysts' estimates of a more than 5% decline. On a day that has been dubbed "worse-off Wednesday", kicking off the new financial year that will see the government's austerity measures take full effect, M&S said it is experiencing "challenging trading conditions." M&S points out that this is against a backdrop of strong growth at the beginning of last year. It added that it has been seeking to deliver affordable clothes to suit shoppers' tight budgets. Rising food sales helped M&S deliver slight like-for-like sales growth overall. Food sales were up by 3.4% on a like-for-like basis, resulting in overall like-for-like sales growth of 0.1%. "Food was also well ahead of expectations, up +3.4% were ahead of consensus of +1.2% and Matrix on +1.5%," Gadsby added.Overall sales were up by 4.2%, with the UK seeing a 3.2% rise and overseas sales up by 12.6%. M&S, which announced last week that it is moving back into the French market, said strong growth in most markets was offsetting weakness in Ireland and Greece. "We expect the trading conditions to be increasingly challenging due to pressure on consumers' disposable incomes and higher commodity prices," said chief executive Marc Bolland. "As a result we are cautious about the outlook." M&S issued guidance of an increase in gross margins of between 0 and 25 basis points (nought to a quarter of a percentage point) in the financial year 2011/12. Operating costs are expected to increase by about 5%."Consensus must move up, even with the company saying that it is (inevitably) cautious about the trading environment," predicts Gadsby, noting that comparative figures get easier for M&S from here. With that in mind, "M&S suddenly looks very good value," Gadsby reckons.Sam Hart, at Charles Stanley, is planning to review his forecasts in detail but his initial inclination is to leave his earnings per share estimates for 2010/11 and 2011/12 unchanged at 33p and 34p, respectively.Hart notes that on his earnings estimates, the shares trade on a March 2012 price/earnings multiple of 10.0, representing a small premium to the general retail sector, a premium that Hart feels is justified by "the group's scale, international presence and freehold property portfolio"."We do not ... anticipate a 'meltdown' in consumer expenditure, given our belief than unemployment is somewhere close to the peak and that any increases in interest rates will be relatively modest. It is also worth highlighting the older demographics of M&S's customer base and a bias towards higher socio-economic groups. We think these groups are likely to be impacted less by the above mentioned pressures. We therefore expect sales and profits at M&S to be relatively resilient in 2011/12," Hart says."The c.5% dividend yield is attractive in itself and we have a good degree of confidence that it will at least be maintained over the medium term," Hart states.Charles Stanley's rating for the shares remains at "accumulate".RG