May 21, 2014
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M&S warns new website to hurt trading

May 21, 2014

LONDON, United Kingdom - British retailer Marks & Spencer warned its new website would dent first-quarter sales figures, but held out the prospect of cash returns to investors as a more efficient supply chain boosts profitability after three years of decline

M&S shares fell as much as 3.8 percent on Tuesday after it said the website would take up to six months to "settle in" after launching in February, hitting general merchandise sales in the three months to the end of June.

Britain's biggest clothing retailer, which also sells homewares and upmarket food, said no one in the company would receive a bonus payment this year as performance targets had not been met. The last time M&S did not pay any bonus was 2008-09.

"Nothing's gone wrong," Chief Financial Officer Alan Stewart told reporters when asked about the new website, a pillar of M&S's intended transformation into an international retailer reaching customers through stores, the web and mobile devices.

"It will take four to six months to settle down... We've seen others in the market who've taken longer. But it's what we expected to see," said Stewart, pointing out that 2.5 million customers had registered on the new website, including 700,000 new customers.

Some analysts were skeptical. "We understand that the declines here have been material and we are not sure that this is just a natural settling down process or something more," said Espirito Santo analyst Tony Shiret, who has a "neutral" rating on M&S shares.

The company said better clothing sales evident in its fourth quarter had continued in its stores in its new financial year, while the food business continued to outperform the market.

M&S is trying to shake off a reputation for functional but dull clothes, with its new strategy focusing on higher quality and more fashionable styles that satisfy its core customers aged 45 and over while also appealing to younger shoppers.

CEO Marc Bolland has spent 2.3 billion pounds ($3.9 billion) in the last three years pushing through the changes to address decades of under-investment, overseeing the redesign of products and stores and an overhaul of logistics to serve the new website.

But a new clothing team he set up in 2012 has so far failed to deliver a durable pick-up in sales and, for the first time, M&S earned less in the year to the end of March than its faster growing rival Next.

Full-year sales of 10.3 billion pounds - up 2.7 percent from a year earlier - were well below a revised target Bolland set in 2012 of 10.8-11.5 billion pounds.

"They're telling the right story in terms of spending coming down and return of cash to shareholders, but the underlying trading is no great shakes," said one M&S shareholder.

The general merchandise division has posted eleven consecutive quarters of underlying sales declines. Profits have been propped up by 18 straight quarters of growth at M&S food.

Excess cash

M&S said its general merchandise gross margin would grow by about 100 basis points in 2014-15 due to a more efficient supply chain, while its food gross margin was expected to grow by 10-30 basis points as a result of further operational efficiencies.

It forecast a "significant" improvement in the general merchandise gross margin in the following two years and a further "step up" beyond that as the benefit of heavy investment in logistics flows through.

That investment will not, however, include a new distribution centre at the Thames Gateway, east of London, which is no longer going ahead, saving M&S 130 million pounds.

Capital spending would fall from 710 million pounds in 2013-14 to 500-550 million pounds in each of the next three years.

"This gives potential for any excess cash to be returned to shareholders on a regular basis," said Bolland.

M&S held its dividend at 17 pence and said it was committed to maintaining a progressive dividend policy with dividends broadly twice covered by earnings.

"We expected firmer indications on capital repatriation, (and) a better general merchandise gross margin recovery than now indicated," said Shiret, maintaining a "neutral" rating on the stock.

M&S made an underlying pretax profit of 623 million pounds in the year to March 29, down 3.9 percent from 2012-13 but ahead of an analyst consensus forecast of 615 million pounds.

M&S shares were down 4.5 pence at 445.5 pence at 10:27 am ET (1427 GMT).

May marks a decade since retail tycoon Philip Green proposed to pay 400 pence a share, or 9.1 billion pounds, for the retailer, which made a profit of 763 million pounds in 2003-4.

M&S says comparing Green's proposal with the current share price is unfair given 10 years of dividend payments, a 2004 tender offer and a 2007-08 share buyback. However, Green's camp argues that, in real terms, M&S's share price is below where it was in 2004.

$1 = 0.5943 British Pounds

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