Marks & Spencer Makes A Billion

By Rodney Hobson | 20 May 2008

| 7 Comments

Profits have topped £1 billion at Marks & Spencer (LSE: MKS)  but chief executive Sir Stuart Rose has much to do to justify his appointment as chairman.

Pre-tax profits for the 52 weeks to 29 March jumped 20.5 per cent £1.13 billion. After stripping out gains on property disposals and other exceptionals, the improvement was a more modest, though still reasonable, 4.3 per cent. This was better than analysts had expected.

Sales rose 5.1% to just over £9 billion with the UK 4.2 per cent ahead and the much smaller international side up 16.8 per cent.

However, these bare figures cannot hide the fact that the UK side is struggling. UK like-for-like sales actually slipped 0.5 percent over the 12 months, with food performing nearly as poorly as general merchandise despite heavy TV advertising.

In fact, M&S failed to beat the targets it set itself in April last year for the payment of bonuses, although it will be dishing out £12.8 million to teams in the stores anyway. What is the point in setting bonus targets if payments are made when targets are missed?

Things are getting worse rather than better on the general merchandising side, where sales at stores that had been open for more than a year slumped 3.1 per cent in the final quarter. The only thing one can say in favour of this figure is that it was nothing like as bad as the performance at great rival Next (LSE: NXT) .

Food has fared better but was still down 0.5 per cent year on year.

So why have overall sales moved up when the same store numbers are weak?

M&S sales have been driven by three factors. The chain opened new stores, thus increasing selling space by 4.8 per cent. It refurbished 35% of existing outlets, so 70% of the portfolio has now been modernised.

Secondly, the belated move into online shopping is quickly bearing fruit. Thirdly, international profits were up by a third, with 20 per cent extra space added in the year, mainly in central and eastern Europe and in India. A store is due to open in Shanghai this autumn, the first in China.

Tougher times

Rose points to ‘tougher economic conditions' in the second half of the financial year. He expects market conditions to remain difficult for the foreseeable future.

Trading for the first seven weeks of the current financial year has been mixed. April was a difficult month, reflecting ‘dramatically different weather patterns' compared with the same period last year. May to date has shown a marked improvement.

An update on first quarter sales will be issued on July 9.

An early modest rise in the share price after the results came out soon dissipated, though a sharp fall in the FTSE 100 index hardly helped. M&S was down 14p at 403p.

With the dividend total up 23 per cent at 22.5p, there is plenty of compensation for investors seeking income. With a forward price/earnings ratio of 10 and the prospective yield at 5.6%, the difficult trading conditions look to be priced into the shares.

After falling from 700p a year ago M&S shares seem to have settled around 400p. They could be worth looking at below that level despite the obvious worries over consumer confidence.

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Rodney Hobson is the author of Shares Made Simple

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