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ESTÉE LAUDER COMPANIES
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Published
Nov 8, 2017
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M&S in strategy tweak, heavier online focus, fewer clothing stores

Published
Nov 8, 2017

M&S results always make interesting reading so with warnings from analysts that the picture would be bleak for the half-year to September 30, did the chain live up (or down) to expectations when it reported on Wednesday morning?


M&S



Well, yes and no. The figures were a mixed bag of good news and bad. But what became most clear was that the sands are shifting fast under M&S as consumer behaviour changes and that last year’s big new strategy might be irrelevant this year, so change is the key theme. 

And if you don't want to read further that change can be summed up in one (admittedly long) sentence: The company wants a much bigger chunk of its sales to be online and will close physical stores more quickly; it wants to be an essentials destination for clothing, especially key specialist areas (like lingerie) in which it's popular; and it still wants to grow in foods, but maybe not as fast as it had thought a year ago.

That means that while this time last year, a huge focus on the Foods division was the flagship strategy, that’s now being slowed and the big focus areas today are key categories within Clothing & Home as well as major digital expansion.

THE FIRST HALF

The shift has come after a six-month in which revenue rose slightly but underlying profit dropped, and in which M&S “made good progress in remedying the immediate and burning issues”. But while Clothing & Home and International ops improved, the Foods division, which had been the key growth area, “faced stronger headwinds”.

CEO Steve Rowe said that “in Clothing & Home early results are encouraging and in International we now have a profitable and robust business.”

M&S said Clothing & Home revenue was “level” (ie flat) but full-price sales were up 5.3% “due to better product at lower prices, fewer promotions and two fewer clearance sales.” The gross margin was up 140bps, as the company leveraged its sourcing capabilities and fully offset currency headwinds. Comp sales dipped, but only by a better-than-expected 0.7% and they improved in Q2 on the back of cool September weather. 


M&S



But, of course, since the first half ended, we’ve had the October storm that has seen a raft of fashion retailers reporting slow sales. M&S didn’t have anything to say about that on Wednesday so we don’t know how hard it was hit.

We do know that in H1, its star area, the Food division, also saw a comp sales dip. Overall revenue rose 4.4% here but this was driven by new stores and the gross margin was down 130bps due to higher costs and M&S not passing price rises on to customers.
 
It all added up to overall group revenue rising 2.6% to £5.125 billion, while comparable sales fell 0.3%. Underlying profit fell 5.3% to £219.1 million but net profit rose 432% to £84.6 million. Importantly, international profits trebled to £60.3 million as a result of “decisive action to reduce losses in owned markets, as well as favourable currency movements”. 

NEXT STEPS

So what comes next? As mentioned, a year ago, all the talk was about Food expansion. But today it said it will “reposition” its Food business including slowing its Simply Food store opening plan. Instead, the company now aims to “build on our progress in Clothing & Home to focus on becoming the UK's essential clothing retailer”. 

That will see it accelerating its UK Clothing & Home “space rationalisation plan”, which means closing more stores. It also wants to get one-third of this division’s sales through online channels, as well as “substantially” cutting its cost base and it will “work with key International franchise partners to build a growing, profitable International business.” 

This switch for a Foods to a Clothing & Home focus could seem like a see-saw strategy that’s more responsive to short-term consumer spending shifts than it should be. 

However, there looks to be good commercial sense behind it. The company said that after closing some Clothing & Home-focused stores already, sales had transferred to other locations at better than expected rates, so speeding up further closures, space reduction and relocations seems logical.

“Our intention is to reshape the estate to focus on high volume locations with conforming store size and fit-for-purpose back-of-house facilities,” it said.

It also looks like it will put more focus on specialist clothing areas. The company admitted that its position in Clothing & Home has eroded over the last 15 years as e-tailers, foreign rivals and discounters have grabbed market share. But it said the business retains very strong market positions in lingerie, schoolwear, denim, suits and some other areas.

No surprise then that in Q2 it reallocated space in 56 stores from womenswear to “areas of growth opportunity” such as kidswear and interiors.  

M&S still wants to become the UK's “essential clothing retailer and said it’s investing "to ensure that our quality is unrivalled at any given price point.”


M&S



It also plans to invest in its online capabilities “to ensure a more personalised and seamless customer journey, and much greater convenience” and expects its online share of sales to grow “very significantly”. That figure of one-third of Clothing & Home sales happening online won’t happen overnight but the firm said it’s a “medium term” aim. Online sales rose only 5.7% in the first half and still make up only a small proportion of the M&S total so the growth opportunity here is clearly large.

So it’s clear that the firm’s turnaround is still very much work in progress and change is on the horizon. With a new chairman, a new head of its non-food business, the departure of its fashion chief Jo Jenkins and the planned departure of its finance chief that was announced Wednesday, that would be change enough for many businesses. But it looks like change is going to go much deeper and be more longer lasting than expected. Watch this space.

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