* M&S FY underlying pretax profit 623 mln stg, down 3.9 pct
* FY sales 10.3 bln stg, up 2.7 pct but below target
* Forecasts higher margins, capex drop, possible cash return
* No annual bonus to be paid to any employee
* Shares fall 3.8 pct (Adds detail, background, CFO comments, updates shares)
By James Davey
LONDON, May 20 (Reuters) - British retailer Marks & Spencerwarned its new website would dent first-quarter sales figures,but held out the prospect of cash returns to investors as a moreefficient supply chain boosts profitability after three years ofdecline.
M&S shares fell as much as 3.8 percent on Tuesdayafter it said the website would take up to six months to "settlein" after launching in February, hitting general merchandisesales in the three months to the end of June.
Britain's biggest clothing retailer, which also sellshomewares and upmarket food, said no one in the company wouldreceive a bonus payment this year as performance targets had notbeen met. The last time M&S did not pay any bonus was 2008-09.
"Nothing's gone wrong," Chief Financial Officer Alan Stewarttold reporters when asked about the new website, a pillar ofM&S's intended transformation into an international retailerreaching customers through stores, the web and mobile devices.
"It will take four to six months to settle down... We'veseen others in the market who've taken longer. But it's what weexpected to see," said Stewart, pointing out that 2.5 millioncustomers had registered on the new website, including 700,000new customers.
Some analysts were sceptical. "We understand that thedeclines here have been material and we are not sure that thisis just a natural settling down process or something more," saidEspirito Santo analyst Tony Shiret, who has a "neutral" ratingon M&S shares.
The company said better clothing sales evident in its fourthquarter had continued in its stores in its new financial year,while the food business continued to outperform the market.
M&S is trying to shake off a reputation for functional butdull clothes, with its new strategy focusing on higher qualityand more fashionable styles that satisfy its core customers aged45 and over while also appealing to younger shoppers.
CEO Marc Bolland has spent 2.3 billion pounds ($3.9 billion)in the last three years pushing through the changes to addressdecades of under-investment, overseeing the redesign of productsand stores and an overhaul of logistics to serve the newwebsite.
But a new clothing team he set up in 2012 has so far failedto deliver a durable pick-up in sales and, for the first time,M&S earned less in the year to the end of March than its fastergrowing rival Next.
Full-year sales of 10.3 billion pounds - up 2.7 percent froma year earlier - were well below a revised target Bolland set in2012 of 10.8-11.5 billion pounds.
"They're telling the right story in terms of spending comingdown and return of cash to shareholders, but the underlyingtrading is no great shakes," said one M&S shareholder.
The general merchandise division has posted elevenconsecutive quarters of underlying sales declines. Profits havebeen propped up by 18 straight quarters of growth at M&S food.
EXCESS CASH
M&S said its general merchandise gross margin would grow byabout 100 basis points in 2014-15 due to a more efficient supplychain, while its food gross margin was expected to grow by 10-30basis points as a result of further operational efficiencies.
It forecast a "significant" improvement in the generalmerchandise gross margin in the following two years and afurther "step up" beyond that as the benefit of heavy investmentin logistics flows through.
That investment will not, however, include a newdistribution centre at the Thames Gateway, east of London, whichis no longer going ahead, saving M&S 130 million pounds.
Capital spending would fall from 710 million pounds in2013-14 to 500-550 million pounds in each of the next threeyears.
"This gives potential for any excess cash to be returned toshareholders on a regular basis," said Bolland.
M&S held its dividend at 17 pence and said it was committed to maintaining a progressive dividend policy withdividends broadly twice covered by earnings.
"We expected firmer indications on capital repatriation,(and) a better general merchandise gross margin recovery thannow indicated," said Shiret, maintaining a "neutral" rating onthe stock.
M&S made an underlying pretax profit of 623 million poundsin the year to March 29, down 3.9 percent from 2012-13 but aheadof an analyst consensus forecast of 615 million pounds.
M&S shares were down 4.5 pence at 445.5 pence at 1427 GMT.
May marks a decade since retail tycoon Philip Green proposedto pay 400 pence a share, or 9.1 billion pounds, for theretailer, which made a profit of 763 million pounds in 2003-4.
M&S says comparing Green's proposal with the current shareprice is unfair given 10 years of dividend payments, a 2004tender offer and a 2007-08 share buyback. However, Green's campargues that, in real terms, M&S's share price is below where itwas in 2004.($1 = 0.5943 British Pounds) (Reporting by James Davey; editing by Paul Sandle and TomPfeiffer)
Marks & Spencer (MKS)
Next (NXT)