* Q4 general merchandise like-for-like sales down 0.6 pct
* Clothing like-for-like sales up 0.6 pct; Food up 0.1 pct
* CEO says firm showing "step by step" improvement
* M&S expected to make less annual profit than Next forfirst time
* Shares rise up to 3.3 pct, then fall back (Adds detail, CEO, investor comment, shares)
By James Davey
LONDON, April 10 (Reuters) - British retailer Marks &Spencer posted its best quarterly performance inclothing for three years, indicating its turnaround plan mayfinally be gaining traction after billions of pounds ofinvestment and several false dawns.
Marc Bolland, chief executive since 2010, is at the end of athree-year, 2.3 billion pounds ($3.9 billion) plan to addressdecades of under-investment.
The 130-year-old firm has tried to shake off criticism thatits clothes are dowdy, with its new strategy focusing on higherquality and more fashionable styles as it seeks to satisfy itscore customers aged 45 and over, while also appealing to youngershoppers.
Bolland has also spent heavily on redesigning stores andoverhauling logistics to complement a new Internet platform,aiming to turn M&S into an international retailer that reachescustomers through stores, the web and mobile devices and isbetter able to compete with faster-growing rivals like Next.
Shares in Britain's No.1 clothing retailer, which also sellshomeware and upmarket food, have increased 20 percent over thelast year on recovery hopes and rose up to 3.3 percent in earlytrading on Thursday after it said clothing sales at stores openover a year rose 0.6 percent in the 13 weeks to March 29.
But the share price fell back after M&S's analysts call, tobe down 1.9 percent at 1237 GMT, reflecting concern aboutnarrowing margins and also disappointment that Bolland iskeeping investors waiting for a strategic update until 2013-14results are published on May 20.
"The numbers are nothing sparkling but they're a little bitbetter than people had feared," said a fund manager at one ofM&S's top ten shareholders.
"They've been in a real investment phase ... It just needssome time for that to bed in now."
A new clothing team set up in July 2012 and led by JohnDixon, the former head of food, has previously failed to deliveran anticipated pick-up in sales, including at Christmas, despitenew ranges receiving generally positive reviews.
"Womenswear was encouraging with a performance ahead ofclothing and clear signs of improvement," Bolland toldreporters. "We have always said we will improve step by step."
New fashion ranges have been backed by high-profileadvertising campaigns featuring some of Britain's biggest femalecelebrities, such as singer Rita Ora, actress Emma Thompson andmodel Alek Wek.
"There is more (being) sold in better and best (pricedclothing). There is interest from people in higher qualityclothing that we are satisfying," said Bolland.
MARGIN GUIDANCE CUT
Clothing forms part of M&S's general merchandise division,which also includes homeware and footwear.
Fourth quarter like-for-like sales in the division fell 0.6percent, an eleventh straight quarterly fall, partly reflectingthe impact of the absence of an Easter holiday in the quarter onhomeware sales and reduced marketing for online homeware salesas the firm moved to its new Internet platform.
That outcome compared with a third-quarter decline of 2.1percent and was towards the top of a range of analysts'forecasts of a fall of between 0.5 percent and 1.5 percent.
"Although hardly a stellar performance, ... (it) is thefirst positive figure in (the clothing part of) generalmerchandise in almost three years and does suggest that the newmanagement team may be making progress," analysts at MorganStanley said.
But despite the improving sales picture, M&S cut its UKgross margin guidance for the 2013-14 year to a fall of 20 basispoints from flat previously, reflecting lower prices in "ahighly promotional market".
In May the firm is expected to report a third straight fallin annual profit. Analysts are forecasting a profit before taxand one-off items of about 615-620 million pounds - that wouldbe 7 percent less than M&S made in 2012-13 and for the firsttime less than Next's annual profit.
Bolland will also miss a revised target he set in 2012 toincrease total sales to 10.8-11.5 billion pounds in the 2013-14year. Analysts are forecasting about 10.3 billion pounds.
"We'd need to see the clothing improvement continue foranother three to four quarters at least before we can even talkof a turnaround," said James McGregor, director of retailconsultants, Retail Remedy.
M&S's food business, which contributes over half of groupsales but less profit, is performing better, though here growthslowed due to the timing of Easter.
Like-for-like food sales rose 0.1 percent versus analysts'forecasts in a range of flat to up 0.5 percent, and against athird-quarter rise of 1.6 percent. The outcome, an eighteenthstraight quarter of growth, represented an outperformance of thewider grocery market.
Adjusting for the absence of Easter in the period,like-for-like food sales were up 1.8 percent, M&S said.
($1 = 0.5971 British pounds) (Reporting by James Davey; Editing by Kate Holton and PravinChar)
Marks & Spencer (MKS)