LONDON (Alliance News) - Marks & Spencer Group PLC shares rose to the highest level since December 2007 Wednesday, after the retailer posted profits that beat analysts' expectations as it discounted less and improved its product sourcing, and it further sweetened the news for shareholders by announcing a GBP150 million share buyback.
The clothing and food retailer reported a pretax profit for the year ended March 28 of GBP600.0 million, up 3.4% from the GBP580.4 million reported the year before and the highest pretax profit for three years.
Excluding items including restructuring costs and charges for an insurance mis-selling provision at M&S Bank, its closely-watched underlying pretax profit was GBP661.2 million, beating analysts' expectations of GBP648 million, marking the first increase in underlying pretax profit for four years.
Revenue remained flat at GBP10.3 billion, with a 0.7% sales increase in the UK offset by a 5.7% decline in international sales. However, gross margin improved strongly in its general merchandise business and also rose in its food business.
M&S has been struggling with its general merchandise business, which sells fashion and homewares, for a decade or more, and that business failed to meet expectations in the full year, with sales falling 2.5% in the period, or 3.1% on a like-for-like basis. However, general merchandise did demonstrate positive like-for-like growth in the final quarter, and its gross margin for the year improved by 190 basis points, benefiting from sourcing gains and slightly lower discounting.
General merchandise gross margin is expected to grow by 150 to 200 basis points in the current financial year, with modest sales growth, M&S added.
Meanwhile, the M&S food business, which traditionally does very well, posted sales growth of 3.4%, or 0.6% on a like-for-like basis, meaning food has delivered 22 consecutive quarters of like-for-like growth, M&S said, despite challenging conditions in a deflationary food market where supermarkets are battling it out in a price war. Gross margin in the food business rose 30 basis points.
"We are transforming M&S into a stronger, more agile business - putting the right infrastructure, capabilities and talent in place to drive our strategic priorities," Chief Executive Marc Bolland said in a statement.
International sales were hit by geopolitical issues, particularly in Russia, Ukraine and Turkey, the company said, adding that it expects this part of the business to continue to be hit by a weaker euro and macroeconomic challenges in the first half of the current financial year.
These issues contributed to a GBP30 million profit hit, Bolland told journalists, but he added that although the company's partner in that region has suffered difficulties, it is a "very strong" and "very serious" partner.
Despite these problems, M&S said it still sees a long-term growth opportunity across a number of international markets.
The business in Ireland and the Czech Republic demonstrated an improvement in profitability, while India continued to achieve a double digit like-for-like performance, and a roll-out of standalone food stores has started in Paris and Hong Kong. Meanwhile in China, five smaller regional stores were closed to be replaced by flagship stores in Beijing and Guanghzou.
M&S will pay a total dividend of 18 pence, up 5.9% from the 17p paid the prior year, and said it will initiate "an ongoing programme of enhanced returns for shareholders" with a GBP150 million return of cash in the current year through share buybacks. It cited a further increase in free cash flow, which rose GBP96.3 million to GBP524.2 million.
Its capital expenditure dropped to GBP526.6 million from GBP710.0 million in the previous year, as it completed many of its large infrastructure projects. It has spent several years trying to improve the look and feel of its UK stores, as well as investing in new stores at home and abroad and its supply chain and technology. Spending on all these fell in the financial year.
"We are a more capable business following a sustained period of investment in our infrastructure and in our people. Our focus continues to be on delivery of the strategy and improvement in shareholder returns," Chairman Robert Swannell said in a statement.
"Some disappointment may be pointed to as parts of the market expected a bigger share buyback programme, but with the amount of [capital expenditure] M&S has had to employ to get itself back to profit growth, the announced levels are understandable," London Capital Group analyst Will Hedden said in a note.
"Shareholders will be rewarded for their patience with an increased dividend and a share buyback. M&S shares have actually been strong since the Autumn, and are now pushing into areas not seen since 2007," he added.
M&S said it is confident it will continue to make improvements in turning the business around. Commenting on the process it is taking to transform the company, Bolland told journalists: "This is a step-by-step approach and I think we're taking steps in the right direction."
Shares in M&S were trading up 0.5% at 588.50 pence Wednesday morning.
By Karolina Kaminska; karolinakaminska@alliancenews.com @KarolinaAllNews
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Marks & Spencer (MKS)