Marks and Spencer served up a strong set of results this week, thanks to the food business that it intends to grow further, says James Durston
The nationals have been obsessed with the nascent signs of recovery shown by Marks and Spencer&'s clothing and general merchandise business. But, it is
its food operation that has driven growth across the group, judging by the figures revealed in its preliminary results this week.
And it hopes to grow its market share in UK grocery from 4% to 5% &"in the very near future&", declared an upbeat chief executive, Stuart Rose, at the presentation.
Rose was in good form at the briefing, a sure sign that morale is high. &"We&'re in good nick,&" he said, at least three times on the day. The only area that marred the strong profit performance was costs, which have shot up because of the store refurbishment programme.
This has proved far more expensive than anticipated. Rose said that M&S would spend at least £300m revamping a third of the
retailer&'s 400 stores during the
current financial year - up to £90
a square foot compared to the
expected £70.
The news sent shares tumbling and analysts were divided over the programme&'s value. But Rose insisted it was worth it: &"Should I spend £3m on a store and redo it
in three years&' time or £12m that will last 25 years? Invariably, we&'ll be doing the latter.&"
As for the food business, a number of initiatives, started in the past year, have underpinned its strong growth. A new 100,000 sq ft food warehouse in Bristol will be fully operational by the end of the year; 28 recently acquired Iceland stores will be opened as Simply Food outlets this summer; and new ranges of healthy food and
advertising campaigns for luxury products have been capitalising
on the growing trends for both health and indulgence.
But although Rose revealed it would be expanding its food
operation on the back of the results, he played down the role of food going forward. He said: &"Food is not the most important thing in getting back to where we want to be. It&'s doing well, but we have to do well across the whole business.&"
Steven Sharp, marketing director, added: &"We are 50% food, 50% clothing and 100% own label. Our priority is everything, and we&'ll be pushing everything.&"
Most analysts believe that non-food will ultimately emerge as the key driver. Clothing and home revenues were static over the course of the year, but enjoyed a much stronger second half compared with the first half.
Jonathan Pritchard, global head of food retail research at Oriel Securities, says: &"Its performance in general merchandise is superb. It is growing footfall and impressing customers. I think its general merchandise division is the most important part of its recovery.&" According to analysis by Milward Brown, M&S is now neck and neck with Next in terms of customer perceptions of the style, quality and value of their womenswear. The fact that Rose hinted at extending the brand to electrical products such as cameras would suggest that he agrees that the performance of the general merchandise division is crucial.
Nevertheless, the importance of the food business in tapping into the trend for health and quality cannot be underestimated. M&S&'s performance in food relative to the market is the best it&'s been for two years, overtrading by around 4%. Although basket sizes are down for food, values are up.
New biodegradable packaging, more healthy products (the Eat Well range now makes up a third of its food offering) and the success of the Simply Food outlets suggests there will be no letting up.
Almost 50% of sales in Simply Food come from health- and quality-conscious 16- to 34-year-olds, and depending on the success of a trial in nine BP forecourts, there is an opportunity for expansion.
Pritchard says: &"These outlets fill the gap for healthy, quality food perfectly. You can be sure that whether it is single sites or groups of sites like the Iceland deal, they&'ll be looking for more stores to push Simply Food hard.&"
Some 60 to 70 additional stores will be refurbished by this time next year. Prices are dropping too, with 31% of M&S products in the lower of M&S&'s three pricing categories compared to 17% last year, which means stores are accessible to more customers too.
With the shares at 544p, way above the 400p Philip Green offered two years ago, Rose hopes that where he has been talking about a &'recovery&', he&'ll soon be saying &'recovered&'. &"We&'ve done pretty well,&" he says. &"Margins are up and we&'re getting top-line growth again. We have a deliverable plan in place that should see us continue to drive the business.&"
the results in full
Pre-tax profits adjusting for exceptionals were up 35.1% to £751m while total sales rose 4.1% to £7.8bn. The group revealed a 3.6% growth in like for like food sales for the year to 1 April, ensuring overall growth of 1.3% despite a 1% decline in general merchandise sales over the same period. Operating profit before excep-tional charges were up 31.8% to £856m and total share dividends up 15.7% to 14p. Shares closed 3.2% down at 549.75p on the news.
The nationals have been obsessed with the nascent signs of recovery shown by Marks and Spencer&'s clothing and general merchandise business. But, it is
its food operation that has driven growth across the group, judging by the figures revealed in its preliminary results this week.
And it hopes to grow its market share in UK grocery from 4% to 5% &"in the very near future&", declared an upbeat chief executive, Stuart Rose, at the presentation.
Rose was in good form at the briefing, a sure sign that morale is high. &"We&'re in good nick,&" he said, at least three times on the day. The only area that marred the strong profit performance was costs, which have shot up because of the store refurbishment programme.
This has proved far more expensive than anticipated. Rose said that M&S would spend at least £300m revamping a third of the
retailer&'s 400 stores during the
current financial year - up to £90
a square foot compared to the
expected £70.
The news sent shares tumbling and analysts were divided over the programme&'s value. But Rose insisted it was worth it: &"Should I spend £3m on a store and redo it
in three years&' time or £12m that will last 25 years? Invariably, we&'ll be doing the latter.&"
As for the food business, a number of initiatives, started in the past year, have underpinned its strong growth. A new 100,000 sq ft food warehouse in Bristol will be fully operational by the end of the year; 28 recently acquired Iceland stores will be opened as Simply Food outlets this summer; and new ranges of healthy food and
advertising campaigns for luxury products have been capitalising
on the growing trends for both health and indulgence.
But although Rose revealed it would be expanding its food
operation on the back of the results, he played down the role of food going forward. He said: &"Food is not the most important thing in getting back to where we want to be. It&'s doing well, but we have to do well across the whole business.&"
Steven Sharp, marketing director, added: &"We are 50% food, 50% clothing and 100% own label. Our priority is everything, and we&'ll be pushing everything.&"
Most analysts believe that non-food will ultimately emerge as the key driver. Clothing and home revenues were static over the course of the year, but enjoyed a much stronger second half compared with the first half.
Jonathan Pritchard, global head of food retail research at Oriel Securities, says: &"Its performance in general merchandise is superb. It is growing footfall and impressing customers. I think its general merchandise division is the most important part of its recovery.&" According to analysis by Milward Brown, M&S is now neck and neck with Next in terms of customer perceptions of the style, quality and value of their womenswear. The fact that Rose hinted at extending the brand to electrical products such as cameras would suggest that he agrees that the performance of the general merchandise division is crucial.
Nevertheless, the importance of the food business in tapping into the trend for health and quality cannot be underestimated. M&S&'s performance in food relative to the market is the best it&'s been for two years, overtrading by around 4%. Although basket sizes are down for food, values are up.
New biodegradable packaging, more healthy products (the Eat Well range now makes up a third of its food offering) and the success of the Simply Food outlets suggests there will be no letting up.
Almost 50% of sales in Simply Food come from health- and quality-conscious 16- to 34-year-olds, and depending on the success of a trial in nine BP forecourts, there is an opportunity for expansion.
Pritchard says: &"These outlets fill the gap for healthy, quality food perfectly. You can be sure that whether it is single sites or groups of sites like the Iceland deal, they&'ll be looking for more stores to push Simply Food hard.&"
Some 60 to 70 additional stores will be refurbished by this time next year. Prices are dropping too, with 31% of M&S products in the lower of M&S&'s three pricing categories compared to 17% last year, which means stores are accessible to more customers too.
With the shares at 544p, way above the 400p Philip Green offered two years ago, Rose hopes that where he has been talking about a &'recovery&', he&'ll soon be saying &'recovered&'. &"We&'ve done pretty well,&" he says. &"Margins are up and we&'re getting top-line growth again. We have a deliverable plan in place that should see us continue to drive the business.&"
the results in full
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