John Ibbotson, director of Retail Vision:
Profits may be up, but this progress has come at a dangerously high price – M&S has begun to sacrifice quality in its core womenswear battleground. For a brand that owes its totemic position among the middle classes to a hard-earned reputation for quality, shaving quality in the name of cost-cutting risks sowing the seeds of destruction.
M&S’s successful food business continues to be a useful ‘get out of jail’ card, but its ability to save the brand’s skin is being undermined by food deflation. With like-for-like food sales up by a paltry 0.2%, the weakness in the clothing operation is becoming ever more exposed.
Marc Bolland says he wants to stay on another two years at the venerable brand. But unless clothing sales turn round soon, and if he continues his dangerous tinkering with M&S’s reputation for quality in the pursuit of increased profitability, I wouldn’t count on it.”
Shore Capital analyst Darren Shirley:
We cannot deny that we would much rather be writing about stronger GM trading from M&S, so seeing through the positive momentum that commenced at the start of calendar 2015. However, and we have been in this position many times before, it was not to be. Whilst so, management is running the business effectively given trading conditions in our view and seeking to balance the performance effectively for its stakeholders. The group performance is also hindered by international challenges, where M&S is not alone.
Against these constraints M&S has a cracking Food operation where underlying performance is strong in a difficult UK market with sustained gains in market share, alongside what we deem to be aforementioned good capital management, which provides us with comfort.
Whilst we wait patiently for a sustained improvement in GM same-store performance we must bang the investment case drum with one hand behind our backs.
Banco Espírito Santo de Investimento analyst Tony Shiret:
Overall this is a stronger than expected out-turn especially on the gross margin on General Merchandise. This is positive re quantum albeit may raise questions as to the overall length of the programme (are they getting more up-front than anticipated). We have picked up on recent discussions with Next that buying conditions in the Far East are softening (i.e. favourable to retailers) more rapidly than previously anticipated and this may reflect in part confirmation of that.
The other takeaway is that M&S is clearly prioritising gross margin and margin generally vs. sales which continue to be weak in GM and neutral in Food. The 10% reduction in inventory yoy speaks to this as well. We are disinterested in the miss in the international division. In UK Food the negative gross margin is disappointing but at this stage is not a concern (so long as it reverses).
Julie Palmer, Partner at Begbies Traynor:
Whilst M&S has reported improved gross margin, the fear is that core shoppers have been turned off by M&S’s tendency to compromise on quality and design which, in combination with unsuccessful marketing campaigns, brings into question whether the new team under Steve Rowe and Neal Lindsey are pursuing the right strategy.
Speculation is rife that Bolland is casting his gaze over potential acquisitions in a bid to revamp its clothing arm, drafting in external brands for the first time ever. While this bold move could reassure shareholders, Bolland will be under enormous pressure to ensure that adding a raft of niche brands doesn’t confuse its offering and impinge on an improving position overall.
Bryan Roberts, director at Kantar Retail said:
“Any M&S CEO will rue the day that former boss Lord Rose famously declared that “weather is for wimps,” for a combination of unhelpful weather and deepening competition in the fashion market has been blamed for yet another flaccid showing from the retailer in general merchandise. Shareholders might well be beginning to question whether recent hints of green shoots from womenswear were just a false dawn. On the upside, though, profitability is being assisted through a long-overdue consolidation in procurement and more disciplined discounting. Food, meanwhile, continues to tick along respectably thanks to ongoing innovation and seasonal excellence.
Investec analyst Kate Calvert:
Not the easiest of halves given the weather, but the increased flexibility in M&S’ business model stands out – enabling it to deliver first half profit before tax 5% ahead of consensus driven by general merchandise gross margin improvement. Management appears to be more confident on the general merchandise gross margin opportunity overall. With weak comps ahead, risk on numbers remains on the upside. Valuation does not reflect self-help opportunities or cash generation.
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