M&S growth bought at expense of margin but investors relieved

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Marks & Spencer’s performance in  the 13 weeks to 31 December 2011 was below par, according to retail analysts Conlumino.

But investors reacted warmly to the performance, especially in food, where sales rose by 4.5% and 3.0% on a like-for-like basis.

Total sales at M&S were up by 1.8% and 0.5% on a like-for-like basis. Direct sales rose by 22.4% and international business was 8.1% ahead. However, general merchandise sales fell by 0.8% and by 1.8% on a like-for-like basis.

Neil Saunders, managing director of Conlumino, said: “Overall this is a subdued set of results; although it does come on the back of a reasonably strong trading during Christmas 2010, there is no denying that growth has, to a degree, been bought at the expense of margin.

“M&S’s investment in its food division, which has included a more innovative product mix, has helped drive footfall and interest in the offer. With many consumers willing to trade up over Christmas, M&S’s destination status along with some headline discounts, has proved to be a winning formula.

“The general merchandise numbers are far more disappointing. Overall, clothing numbers are slightly positive (+1.1%) but this growth has largely been delivered at the expense of margin. Home is down sharply (-13.3%), which not only reflects M&S’s decision to exit technology but also underlines the fact that there is a lot more work to be done in making this offer compelling for shoppers.

“Direct sales show good progress with a rise of 22.4%. Unfortunately, M&S’s multichannel development is not as advanced as some other retailers and this will most certainly have cost it some growth as more shoppers used the internet this year than ever before.

“These results demonstrate while M&S is far from being in the premiership in growth terms, it can still play a reasonably good game. That said, with a tough outlook for 2012 it needs to work much harder on its general merchandise offer if it is to further extend its share without resort to discounting.”

Paul Mumford, senior fund manager at Cavendish Asset Management, said the results exceeded expectations.

“Marks & Spencer’s showing is particularly heartening; with a strong performance in its food division more than offsetting a slight drop in general merchandise sales. Overall, the core business looks solid. More noteworthy are the impressive 8% growth in international sales, and the whopping 22% growth in direct sales.

“The company’s outlook may be cautious, understandable given the current climate. But with a reasonable rating, an attractive yield of 5.5%, and a share price well below previous highs of £7.00, the stock represents good value in a neglected sector. The company is well-positioned for an eventual recovery in consumer confidence and in time may well look attractive to potential US buyers, especially given the recent share buy-back.

Richard Black, fund manager of the L&G UK Equity Income Fund, agreed: “The market breathed a sigh of relief today as M&S successfully navigated what was a very competitive Christmas trading period. 

“Investors will be pleased to see the solid performance in M&S food, while consumers will have benefited from lower prices in general merchandise as promotions took effect. While profit forecasts are not expected to change this is a better result than many investors expected.”