M&S turns profitable in FY15 but fashion remains challenging

Marks & Spencer (M&S) for the full year ended March 28, 2015 said that the group sales went up 0.4 percent to 10.3 billion pounds with underlying profit before tax improving 6.1 percent. But analysts earlier expectations regarding general merchandise sales, which includes fashion missed their mark as sales slipped 2.5 percent and like-for-like sales down 3.1 percent. However, gross margin improved strongly. Gross margin increased 190bps on the back of significant sourcing gains and slightly lower discounting. The company returned to growth in the final quarter, though sales for the year as a whole were disappointing.

The company said that the UK retail sector was impacted by the third warmest autumn on record and it was disproportionately affected due to high market shares in winter categories such as knitwear and coats. The company also faced disruption at its online distribution centre over the peak Christmas period but have made good progress since then, with M&S.com sales back in growth in the fourth quarter.

While the company has managed to signal at a turnaround in its clothing business, Phil Dorrell of the retail consultancy Retail Remedy says, "Bolland's cost-cutting and investment plans are showing signs of bearing fruit. Dealing with the brand's legacy problems will take much longer - but a clear return to growth after such a long decline will give him the mandate he needs to drive through more changes. These results at least hint that M&S is returning to what it should be - a clothing retailer with a successful sideline in food, rather than a successful food retailer with a moribund clothing business holding it back."

M&S.com sales were down 2 percent over the year. Sales returned to growth in the fourth quarter and the company saw gradual improvement across all key metrics: traffic grew by 15 percent and customer satisfaction rose by 18 percent. International sales were down 2.1 percent on a constant currency basis or 5.7 percent on reported currency. M&S said that very turbulent geopolitically in a number of its franchise territories affected performance in Russia, Ukraine and Turkey, where franchise partner was impacted by political instability and local currency fluctuations resulting in lower shipments. In the Middle East region the macro-economic situation impacted consumer demand. Following the actions taken to restructure business in Ireland and Czech Republic, the company improved profitability in both of these markets. In India, it opened 12 stores and continued to see double digit like-for-like performance.

“We made good progress in three of our four key priorities for the year. In GM, we significantly increased the gross margin, and, while sales performance was below our expectations, we returned to growth in the fourth quarter. 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,” said Marc Bolland, Chief Executive of M&S.

For the financial year 2015/16, general merchandise gross margin is expected to grow by 150bps to 200bps as a result of ongoing sourcing benefits. While under general merchandise, there will be no new net space increase, international space is expected to grow by 5 percent. The company foresees a significant gross margin improvement opportunity, with modest sales growth. M&S anticipates that in the short term, international business will be impacted by the weaker Euro and challenging macro-economic backdrop, particularly in the Middle East region and in the first half of the financial year. However, it still sees a long term growth opportunity for the brand across a number of international markets.