M&S results: good and bad as profits plunge but full-price sales rise
Marks & Spencer was in the spotlight Wednesday morning as the UK retail giant reported its results for the 52 weeks to April 1. And the headline news? Clothing & Home sales fell 2.8% or 3.4% on a comparable basis. And while Q3 had seemed to show an improvement, Q4 looked weak with a 5.5% total sales drop and a 5.9% comp sales drop.
So the roller coaster ride continued and the much-talked about Q3 recovery essentially went into reverse. But as we know, headlines can at times be misleading and there were upsides to the results announcement too with the share price rising in Wednesday morning trading.
The key issue is that the company is selling more full-price fashion and while that didn’t help profits this time round, what can only be described as a profits plunge was largely down to store opening costs, calendar shifts and heavy investment in the fashion offer.
There’s no denying that the latest results did not make happy reading, but on the plus side, the Clothing & Home gross margin was up 105 basis points with full-price sales growth of 2.7%. Online sales rose, loyalty programme members bought more than ever, areas of focus such as kids footwear and bras saw good results and the retailer is convinced that its turnaround plan is on track.
Is that view justified? Let’s look at the headline figures first. Overall group revenue, including the firm’s more successful food operations, rose 2.2% to £10.622bn, but adjusted pre-tax profit fell 10.3% to £613.8m “due to the expected decrease in Clothing & Home sales and increased costs of new space.” International profit before adjusted items was up 15.4% to £64.4m, as a result of the decision to exit owned stores in 10 lossmaking markets. Net profit fell over 70% to £115.7m, but despite earnings per share also plunging, M&S kept shareholders on its side by maintaining its dividend at 18.7p.
There were clearly big challenges in the last year as the company worked hard to get back to full health. And as well as internal challenges, it was hit hard by sales-boosting Easter falling outside of the fiscal period covered and the general tough retail environment was a drag too. That meant that on the surface, the figures gave little indication of a turnaround plan in full throttle.
However, CEO Steve Rowe seemed satisfied, saying: "Last year we outlined a comprehensive plan to build strong foundations for the future. We said we would recover and grow Clothing & Home, continue with our plans for Food growth, remove costs and simplify the business. We achieved a huge amount in the year and while there is still much to do, I am pleased with our progress and we remain on track.”
Rowe said the retailer has made improvements to its Clothing & Home product and proposition, and its customers “have noticed”. And the evidence for that? He said M&S is starting to stabilise market share “and importantly has seen full-price market share growth, as we removed excessive discounting.”
He added: “As we anticipated, the planned restructuring of M&S has come with a cost and has impacted profits, but the business is still strongly cash generative and we reduced our net debt.”
The planned restructuring meant the last year was one of the busiest in its history. M&S finished a strategic review and announced a new approach to its fashion offer that was less about chasing trends and more about targeting its core customer with “wardrobe essentials”. Its new Spend It Well brand message is part of this and underlines that fact that it has “reshaped” its Clothing & Home proposition.
That reshaping includes a more consistent colour palette, improved fit, 18% price reductions on a number of like-for-like lines, reduced promotional activity and 10% fewer lines.
The company has been doing all this at a challenging time. As Rowe said Wednesday, in 2016/17, consumer confidence may have remained broadly stable, even with a dip in the lead up to the Brexit vote. But “there was a divergence between consumers' views on their personal financial situation which remained strong and their views on the economy as a whole, which was more fragile.”
Against this backdrop the clothing market declined by 1.8% (Kantar Worldpanel, 52 w/e 9 April 2017), with intense competition for consumer spending from other discretionary products and services such as leisure and entertainment.
AREAS OF FOCUS
Clearly, this has been a difficult point at which to decide to focus on full-price sales. But Rowe said “we are encouraged by early evidence that our strategy is working,” highlighting that rise in full-price sales and “total market share stabilising” in Q4.
He also said that sales in M&S’s top 100 lines were up 7% last year and sales in “areas of focus”, such as kids footwear were up 10% while its bra market share grew again to 34.9% (Kantar Worldpanel 52 w/e 9 April 2017).
While the company has been focused on avoiding discounts, that’s not to say that prices have been rising, which might have been a tricky strategy as we head towards what could be an even more challenging period for the fashion sector.
In fact, M&S has reduced the prices of around 2,400 lines since January 2016 and launched new, cheaper products. As a result, the proportion of 'good' or entry price point sales have increased by 3% with the proportion in womenswear almost doubling to 15%.
This value proposition is what helped the retailer rein-in promotions last year with three fewer clearance sales and the removal of “unproductive” promotions such as Black Friday category deals. And it has also focused on getting customers who will spend heavily to have M&S on their shopping lists at all times. On this front, its Sparks membership/loyalty programme now has 5.6m members and it is seeing increased frequency of purchase among them.
Online has been a focus too and M&S.com revenues increased by 4.9% in the last year, with online sales penetration increasing to 17%. Performance was impacted by the removal of eight cyber events compared with the prior year but sales growth improved in the second half.
Customer service has also been at the forefront of its thinking. The company said it delivered better customer service through a focus on operational processes at its Castle Donington warehouse. And it invested in service in the areas its customers “most appreciate” such as fitting rooms, men's tailoring and till points.
The result? Customer satisfaction scores improved by 5% points compared with last year. Although the overall Net Promoter Score (NPS) for Clothing & Home was broadly level, it was encouraged by a significant improvement in the rating from its most frequent customers and those in its larger stores, “suggesting customers are noticing and liking the changes we have made.”
That all helped the Clothing & Home gross margin to be ahead of expectations, up around105bps year-on-year as mentioned earlier. Buying margin increased by 100bps despite currency headwinds as it continued to deliver benefits from leveraging its direct sourcing capabilities through re-tendering orders, and by moving business to lower duty locations. Reduced discounting benefitted margin by around 5bps on the year with an 110bps improvement in the second half, as a result of lower stock into sale and better sell-through rates.
The company said Wednesday that it believe the changes it has made are “particularly relevant in the context of a clothing market which declined in 2016/17, and where the outlook remains uncertain.”
So does that mean its work is just about done? Not really. “Further improvements to style and fit will remain core to our strategy,” Steve Rowe said. “In addition, having made a significant investment in price, we will ensure our prices remain competitive while continuing to reduce the number of promotions and clearance sales.”
He also said the company is focused on improving customer experience across its channels. In its smaller stores, in direct response to customer feedback, it is “introducing a greater level of product choice” and overall it is “beginning to rebalance our space towards potential areas of future growth such as Kidswear and Home having completed successful trials.”
It continues to invest to make the online customer journey faster with a particular focus on mobile and “will build on the success of our Sparks programme, with greater levels of personalisation in our offer in the year ahead.”
So will this all pay off as the new finical year continues? That’s not yet clear. In Clothing & Home, the company is expecting a space decline of up to 2%, weighted towards the end of the year and the gross margin to be anywhere from 25 basis points up to 25 down “as we seek to mitigate currency headwinds with better buying and a further reduction in discounting.” Watch this space.
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