Marks and Spencer results – what the analysts say

Shares in Marks and Spencer have fallen sharply in early trading after the UK high street retailer warned that its profits would likely take another hit this year as it pushes through changes to revive its clothing business, while conditions remain challenging both in Britain and abroad.

Here, fastFT rounds up some early analyst reaction to M&S’s full year results and initiatives announced by its new chief executive, Steve Rowe (pictured), who is seeking to reverse declining sales of clothing and homewares.

Andrew Hughes, retail analyst at UBS, says M&S’s results for the financial year just ended, which showed a near 19 per cent decline in pre-tax profit to £488.8m on group revenue of £10.6bn, up 2.4 per cent, were slightly better than expected. Underlying pre-tax profit – which strips out one-off items such as a mis-selling provision for M&S Bank and IT asset write-offs – improved 4.3 per cent during the 53 weeks to April 2, to £689.6m.

But Mr Hughes says M&S’s new strategy is “proving costly”. He says the company’s latest guidance – which includes a warning that profits will be adversely affected in the short-term – “implies a c.10 per cent PBT [profit before tax] consensus downgrade and we expect this to put the shares under pressure”.

Freddie George at Cantor Fitzgerald says there are no real surprises in Mr Rowe’s new strategy, which includes focusing on the quality and fit of clothing, “sharper” ranges, lower prices but less promotional activity.

Mr George calls the new strategy “evolutionary rather than revolutionary” but says the lack of detail in today’s statement will likely be a disappointment. The analyst, who has a “sell” recommendation on M&S added:

We still have concerns that the company will not be able to reverse the declines in General Merchandise (GM) LFL sales while the rate of growth in GM gross margins is likely to slow. In the meantime, the Food division will face a more competitive market, pre-tax profits look set to remain range bound and net debt remains stubbornly above £2bn.

Clive Black at Shore Capital points out that we have been here before with M&S:

this company has had to go backwards to go forwards several times before now.

But the new chief executive, he says, while not being the “man with the golden gun”, is someone with “good and distinctive insights into the challenges of M&S with respect to clothing, beauty and home in particular”. Mr Rowe is also “capable, decisive and passionate about the business”.

Mr Black says M&S’s new chief has set out “firm foundations” for the retailer “in terms of customer count (32m), a still recognised brand, 900 stores, the new online platform and sound international partners”. Mr Black adds:

whilst we have toyed with the idea of downgrading our stock recommendation on M&S until we see the fruits of Mr. Rowe”s labours, we do also back him as more likely to succeed than not and so whilst a recommendation for the more patient minded we are retain our BUY stance on M&S shares. ‎