Marks and Spencer returns to profits growth and announces share buyback

After four years of trying, Marks & Spencer has finally increased its full year profits, lifting them 3.4% to £600m before tax.Chief executive Marc Bolland hailed much improved cashflows after an "outstanding year" for food but admitted the womenswear sales, although they returned to growth in the fourth quarter, were "below our expectations".On group sales up 0.4% to £10.3bn, as anticipated, underlying profit before tax increased 6.1% to £661.2m in the 52 weeks ended 28 March, a sliver ahead of forecasts.This was thanks to management's efforts to limit operating costs to a 1.5% increase while cutting capital expenditure by a quarter to £526.6m.As a result, gross margin was lifted 30 basis points (bps) in food, despite the opening of 62 new Simply Food stores in the period, and by 190bps in general merchandise.Underlying earnings per share rose 2.8% to 33.1p, beating the consensus estimate of 32.7p."We continued to control costs and capital expenditure tightly, resulting in significantly improved free cash flow," said Bolland.So, following the increase in the interim dividend, directors announced a £150m capital return to shareholders and proposed a 7.4% increase in the final dividend to 11.6p, resulting in a 5.9% rise in the total dividend to 18.0p.Independent analyst Nick Bubb said the return of the cash was a "bit less than some had hoped"."As for the modest 6% rise in underlying PBT profits to £661m in the year to March, this hardly makes up for five years of underperformance and disappointment, but hope springs eternal that if management can stabilise top-line sales then the big 150/200bps increase in the clothing gross margin will drop through to the bottom line."The company's guidance for the new financial year might also see "raised eyebrows in the City" said Bubb.Bolland and his team said that general merchandise - womenswear - gross margin is expected to grow by 150-to-200bps as a result of ongoing benefits from better sourcing, with food margins expected to grow by 0-to-10bps due to further operational efficiencies.Less pleasingly, operating costs are expected to increase by circa 4%, "primarily as a result of inflation and new food space", with plans to increase the planned number of new stores from 200 to 250 in the three years to March 2017. although in GM there will be no new net space increase and international space is expected to grow by around 5%.Investec analysts said the GM guidance was encouraging and, seeing upside risk to forecasts, raised its target price to 620p. "A more confident outlook, highlighting the material gross margin opportunity within GM, ongoing outperformance within the food business, with more space opening, and the announcement of capital returns, should be taken well in our view."