Marks & Spencer disappoints with womenswear sales in third quarter

Womenswear sales at Marks and Spencer over the Christmas period were significantly worse than had been expected by City analysts, dragging general merchandise (GM) sales down badly as bad weather and distribution issues clouded the third quarter.GM, principally womenswear, fell 5.8% on a like-for-like basis in the 13-week period to 27 December, precisely twice as fast a decline as the 2.9% suffered in the first half of the year. Consensus was for a 2% decline.Blaming the unseasonal conditions in October and November, which hit the wider clothing sector, M&S online sales were also badly hit by December disruption at its Castle Donington e-commerce distribution centre.Chief executive Marc Bolland pointed out that food had delivered "record Christmas sales, strongly outperforming the market", though this was not enough arrest the 1.6% fall in group sales, down from the 1% gain in the first half.Although the new autumn/winter womenswear ranges had been well received, the warmer autumn weather resulted in a highly promotional competitive market."We deliberately held back the level of discounting especially in December. While this had an adverse impact on sales we delivered a good performance on gross margin," Bolland explained.Across the group, gross margin guidance was kept unchanged at between 150-200 basis points (bps) for general merchandise and 10-30bps for food, with operating cost guidance improved from circa +3.5% to circa +2.0%, as a result of tight control of costs as well as lower volume growth.Despite the distribution woes, the expensive new website, M&S.com, recorded a slight improvement on the first half, with sales down 5.9%.Customer satisfaction and conversion metrics from the site continued to improve over the period, resulting in positive sales growth through October and November before the distribution issues hit in December.The international business saw a reversal of the gains in the first half, falling 5.8% in this latest quarter as worsening currency and macro-economic issues across Middle East and Russia franchise regions took their toll.Analysts reaction was mixed, with Nicla Di Palma at Brewin Dolphin aghast at both the "measly" food and "very bad" general merchandise performance. "Overall, we find this statement really disappointing. M&S has invested in new designers and has been trying to improve the appeal of its womenswear collections for a few years now, but not successfully so far. The bad sales performance outweighs the reduction in costs."Canaccord called it a "curate's egg of an update", praising the food business for managing not to be dragged into the grocery price battle but acknowledging that GM remained "a drag on sentiment" despite the potential of gross margin expansion through supply chain initiatives over the medium-term."Negative sales trends and markdown risks in a discount-driven clothing market could see some erosion of these mooted gross margin gains. M&S.com remains an enigmatic problem child, with the new web platform indeed delivering 'a meaningful difference to our service', as heralded in last year's Q3 trading update - but not in the direction envisaged."Investec's Kate Calvert trimmed her forecasts by 2% with good cost control broadly offsetting weaker sales, but said the bad news overshadowed reasonable recovery progress elsewhere and reiterated her positive stance on the shares."With further progress expected in 2015, we believe the valuation does not reflect the gross margin opportunity and shift to cash generation."