M&S reports drop in annual profit as clothing sales fall - UPDATE

- Pre-tax profit falls 3.9 per cent- Sales at general merchandise weigh on results- Dividend unchangedMarks and Spencer (M&S) reported a 3.9 per cent fall in annual pre-tax profit to 623m pounds, reflecting a drop in sales at the struggling general merchandise division. The consensus estimate had been for £615m in profits before tax and one-off items. General merchandise, the clothing arm which has recently undergone a rapid transformation to turn business around, saw like-for-like sales fall 1.4% in the year ended March 29th. Gross margin at the division was down 110 basis points to 50.7% as a result of the increased cost of promotions and markdowns. It offset an 80 basis point rise in margin to 32.5% at the food business to drag down total UK gross margin by 20 basis points to 40.6%, in line with previous guidance from the company.Multichannel sales growTotal UK like-for-like sales rose 0.2% as food sales increased 1.7%. Group sales were up 2.7% at £10.3bn, including international and multichannel sales, which grew 6.2% and 22.8%, respectively. "We are focused on improving our performance in general merchandise and were pleased to see early signs of improvement," said Chief Executive Marc Bolland. "Our food business had a very strong year, consistently outperforming the market.Three years ago, we recognised the scale of investment required to transform our business,investing to strengthen our foundations and improve our customer offer. We are making solid progress on this journey and are now focused on delivery."UK operating costs advanced 3.5% as the group invested in new space, inflation and business initiatives such as the supply chain infrastructure and improved customer service in stores. Gross margins expected to riseLooking ahead to the coming financial year, operating costs are expected to rise 4% as a result of an increase in depreciation, inflation and the addition of new space. The planned opening of new space will add 1% to UK space, with 2.5% in food and no net space growth in general merchandise. International space is projected to grow by 10%.Gross margin is forecast to climb by 100 basis points in general merchandise - thanks to better sourcing - and by 10 basis points to 30 basis points in food. Stock inexpensive, but analysts skepticalWriting before Tuesday's results broker Numis wrote to clients saying that: "With capex set to normalise from 2014/15 as the bulk of the infrastructure investment reaches its conclusion, the shares look inexpensive, particularly from a forward cash flow perspective. However, having now posted 11 consecutive quarters of negative GM LFLs, despite the better trend, we remain unconvinced by the improvement in the general merchandise division."At least some other analysts were of a similar opinion, with Richard Perks from Mintel voicing his skepticism on the recent improvement in M&S's fashion sales in remarks to Bloomberg TV. The group kept its dividend unchanged at 17p per share. RD