M&S profits rise as food ‘outperforms’ the market and capex tap is turned off

Marks & Spencer (MKS) was one of the biggest risers on the FTSE 100 today, after posting a 3.4% rise in pre-tax profits to £600m.

The stock of the high street bellwether almost reached 600p at lunchtime before settling back to 0.5% up at 588.63p. The share price has risen more than 23% so far this year.

And investors also have a £150m share buyback programme to cheer on the back of the first uplift in profits of CEO Marc Bolland’s leadership, as well as an full year dividend of 18p, 5.9% up on last year.

Analysts put the rise in profitability down to a reduction in capital expenditure, increased sourcing efficiencies and a shift away from perpetual discounts.

Group sales in the year ended 28 March nudged up just 0.4% to £10.3bn, with food the “outstanding” performer. The food business recorded a 3.4% increase in sales – 0.6% on a like-for-like basis – and pushed up gross margin by 30 basis points during the period, despite the intense competition in the sector. M&S said it had outperformed the market and delivered 22 consecutive quarters of like-for-like growth.

The retailer introduced 1,700 new products, equivalent to almost a quarter of its range, in 2014, as well as opening 62 Simply Food stores in the UK, with performance ahead of expectations.

“We made good progress in three of our four key priorities for the year,” Bolland said. “In food, we had an outstanding year in a difficult market. In general merchandise, we significantly increased the gross margin, and, while sales performance was below our expectations, we returned to growth in the fourth quarter.”

He added: “We are transforming M&S into a stronger, more agile business - putting the right infrastructure, capabilities and talent in place to drive our strategic priorities.”

However, general merchandise sales fell 2.5%, with like-for-like numbers also down 3.1%, which the group blamed on the “third warmest autumn on record”. It also faced disruption at the online distribution centre over the peak Christmas period, but added the online operation was in sales growth in the fourth quarter.

International trading also continued to prove difficult with operating profit falling 25% to £92m as sales slipped 5.7% to £1.09bn as a result of instability in Russia, Ukraine and Turkey and problems with the Chinese business.

M&S has invested significant sums in stopping the rot and pushing the business back into growing profitability, with Bolland spending £3.2bn on infrastructure as it upgraded its website, IT systems and distribution network.

“Despite having had very big shoes to fill when taking over five years ago, Bolland inherited a host of legacy issues,” Natalie Berg at Planet Retail said. “He has brought one of Britain’s most iconic brands into the 21st century, putting in place vital new infrastructure, ultimately making M&S a more agile and digitally-aware retailer.

“Granted, it hasn’t been the smoothest of transformations and more work remains to be done, but today’s announcement will have certainly bought Bolland more time in the boardroom.”

Shore Capital upgraded its rating on the company’s shares from ‘hold’ to ‘buy’ after a “tortuous” couple of years. Analyst Clive Black added: “M&S had a business that was on the precipice of harvesting the rewards of very heavy lifting with free cash flow set to mushroom with the capital expenditure tap turned off.

“Despite an excellent performance from the food business throughout this time, which continued through FY2015, the failure to sustainably tickle the general merchandise top line meant that the free cash flow prize did not come through. Therefore, with general merchandise now positive and, we believe, set to remain so for much, if not all, of FY2016, more exciting times could be ahead for shareholders.”