Marc Bolland, Chief Executive Officer of Marks & Spencer Group Plc.
The stock gained as much as 9.1 percent as the U.K.’s biggest clothing retailer said gross margins will widen by more than previously expected in the second half of the fiscal year, driven by cheaper product purchasing and reduced discounting.
“The results look good, particularly on gross margin,” said Jamie Merriman, an analyst at Sanford C. Bernstein. “The big question for management now going into the second half is whether they can hold up gross margin and get some positive like-for-likes. I don’t see any sign of that yet.”
The improved earnings outlook and greater than
expected first-half profit provides some breathing space for Chief Executive Officer Marc Bolland, who has presided over more than three years of falling non-food revenue. A 4 percent drop in the general-merchandise unit’s second-quarter same-store sales was the worst since Bolland took the helm in 2010 as unusually warm September weather stymied demand for coats and sweaters.
The mild fall temperature “overshadowed what was shaping up to be a reasonable half with progress visible on womenswear ranging, gross margin gains and efficiencies,” Kate Calvert, an analyst at Investec Securities, said in a note.
Customers browse a display of women's clothes inside a Marks & Spencer retail store in... Read More
Margin Improvement
Gross margin in the general-merchandise unit will widen by 1.5 to 2 percentage points for the year, M&S said today, more than its previous prediction for a gain of 1 percentage point.The retailer predicted a smaller increase in annual expenses than previously indicated. Operating costs will rise 3.5 percent for the year, compared with the prior forecast of 4 percent, it said, helped by reduced staffing expenses, which fell 2.1 percent in the first half.
The reduced labor costs are “a result of less hours” in “non-customer facing activities,” Paul Friston, the retailer’s interim head of finance, said on a conference call. Headcount is lower due to “natural attrition,” he said.
An improvement in women’s fashion sales prior to September was “encouraging,” Investec’s Calvert said. Womenswear revenue rose 1.3 percent in the first five months of the financial year.
Marks & Spencer shares were up 8.2 percent at 437.8 pence as of 10:22 a.m. in London, the biggest gain in the U.K. benchmark FTSE 100 Index. (UKX)
Higher Dividend
Displaying its confidence in the outlook, M&S raised the interim dividend to 6.4 pence a share from 6.2 pence.First-half underlying pretax profit rose 2.3 percent to 268 million pounds, beating the 253 million-pound average estimate of 18 analysts in a Bloomberg News survey.
September’s warm weather reduced quarterly revenue by about 2.5 percent, M&S estimated. The mild temperatures continued through October, causing main competitor Next Plc (NXT) to cut its full-year forecasts last week.
“The bull case for M&S has always rested on gross margin growth potential in clothing and the scope for cash returns to shareholders, so M&S has delivered what they want today,” Nick Bubb, an independent retail analyst, said by e-mail.
Commenting on the outlook for the peak Christmas selling season, CEO Bolland indicated that M&S will be offering fewer discounts than in past holiday seasons.
The retailer will be able to sell more womenswear at full price because “people will see a lot of newness,” he said.
Same-store sales in M&S’s food division rose 0.2 percent in the quarter, the retailer also said today, compared with the 0.3 percent median estimate of 19 analysts.
The company plans to speed up the expansion of its Simply Food chain, aiming to open about 200 over the next three years. That’s an increase on previous guidance for 150 openings.
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