Sales dwindle despite an increase in group's profits.
Investors surprised at pace of sales decline at Marks & Spencer food division in H1
- Investors thwarted by Marks & Spencer H1 results as shares fall 3% on a day when rest of market is up c. 1%.
- Sales continue to dwindle despite group reporting increased profits of £90m.
- We recommend Marks & Spencer as a ‘hold’ for medium risk investors.
Despite Marks & Spencer reporting increased profits of £90m, which was up by 6% on the same period last year on the back of a tighter control on costs, investors this morning do not seem too enthused by the results.
Like many others in the retail sector, sales are dwindling, down by 3.1% to just under £5bn reflecting the tough trading conditions and the fact that a number of stores have been closed. While the sales decline in Clothing & Home was less than was anticipated, investors seem a little shocked at the pace of sales decline in its Foods division which fell by 2.9% like for like compared to forecasts of 1.4%. Management blamed this on fewer promotions, the lack of price investments, the timing of Easter and the generally tougher trading conditions. Investors haven’t reacted well this morning as the shares are down by nearly 4% on a day when the rest of the market is up by roughly 1%.
The forward looking statements don’t seem to provide too much encouragement either with the group saying that it is “expecting little improvement in sales trajectory” as online competition hots up and discounters march ahead. However, Steve Rowe has implemented a new management structure and is looking to make significant organisational changes to build a foundation for the future.
Modifications include a further 100 store closures while the new strategy will look to play catch-up with its rivals on digital sales - only 20% of Clothing & Home sales are online, compared to Next’s over 50%. The restructuring also includes broadening the family appeal in food, which listening to the Chief Executive’s discussion of this on the Today programme this morning, seems to mean taking on the more traditional food retailers such as Tesco and Sainsbury. This may not play so well with investors as moving down the quality scale would just increase competition and it’s far from certain that M&S could challenge them.
We still take a cautious stance on the shares and the sector in general. We do not see competition abating and still see margin in both food and clothing heading lower. The restructuring is much needed, the sooner the better, while others see that fact that it may to too late to try and play catch-up on online sales with its rivals, especially if the clothing range continues to not appeal to the younger generations who tend have a greater tendency to shop online. We therefore continue to recommend the shares as a ‘hold’ at best for investors seeking a balanced return and willing to accept a medium level of risk.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.