M&S interims preview: A tale of two businesses

The retailer’s food arm will have done well as shoppers continued to treat themselves with high-quality eats.

But general merchandise, in particular the crucial womenswear category, remains in turnaround after a long period in the doldrums, although recent Kantar data gives cause for optimism.

The consensus profit forecast for next week is £262m - down on last year’s comparable period. Food is expected to be up about 3% like-for-like in the second quarter while the expectation is that general merchandise will be down by 1.5%.

M&S chief executive Marc Bolland is expected once again to maintain that progress is being made where the retailer has been missing the target and to emphasise the strong showing in food.

As the countdown to Christmas proceeds, M&S’s food business is looking forward to a quarter as golden as a perfectly basted turkey.

Food has been up like-for-like for 12 quarters, as the retailer’s food boss Steve Rowe pointed out at an analysts’ briefing last week where he also outlined plans to build the business.

M&S unveiled a roll-out programme for its Simply Food fascia and highlighted the many opportunities that remain open in the category.

The retailer intends to open another 150 Simply Food stores in the UK as it makes the most of a format that already generates 34% of M&S’s food sales, which stood at £5bn overall last year.

But 49% of the population are not within 10 minutes’ drive of an M&S food store. While the retailer claims a high market share in cities such as Glasgow, it has much smaller proportions in cities such as Birmingham and Norwich.

Around half of the new Simply Food openings will be company-owned branches measuring between 10,000 sq ft and 15,000 sq ft on retail parks and high streets. The remainder, smaller at 2,000 sq ft, will be run by franchisees in locations such as railway stations, hospitals and airports.

The opening drive will be part of a wider food offensive as the retailer leverages its reputation for product quality, innovation, provenance and value for money.

M&S is keen to extend its reach in various types of dining and product categories. For instance, it holds a 41% ‘occasion shopping’ share of meals bought ‘for tonight’, helped by its strength in quality and convenience, but only has a small share of frozen - one of the big opportunities to be addressed.

And while potatoes represent the second biggest destination category at supermarkets across the board, M&S speaks for less than 1% market share in that product.

Ambitious plans well-received

The opportunity, according to Rowe, is for M&S to make itself “more relevant, more often”, extending its reach beyond the 20% of its shoppers who account for 80% of its food revenues.

He said: “Over the last three years we’ve reinforced M&S’s everyday specialist food market position through exceptional quality food, groundbreaking products and unrivalled ethics.

“We’ve brought this to life for our customers through inspirational food halls with specialist bakeries, delis and now florists. This offers us exciting opportunities to grow our business.”

M&S’s food ambitions went down well with City analysts. Shore Capital’s analysts noted: “M&S has benefited to our minds from a reconnection with its core: high-quality product specifications, sustained innovation and exclusivity - traits that it allowed to slip in prior years.

“The offer is now back in a groove and proving popular with an increasing number of customers as footfall is driving sales alongside basket size generation.”

Nomura’s Fraser Ramzan said: “The group’s trading priorities and its philosophy of continued reinvestment of productivity gains in its offer should enable it to continue to grow profitably. This lends credibility to the plan of 150 new stores, which could add several percentage points to UK sales growth.”

Changes will be evident beyond Simply Food. M&S is trying out in-store cookery demonstrations and has introduced an ‘event zone’ to promote lines for special occasions such as Guy Fawkes Night and Christmas.

General merchandise shake-up

Changes to the food offer in the main stores matter because food is a big footfall driver, also providing the chance to sell general goods which have a higher margin.

In the last full year, M&S’s food gross margin was 31.7% while general merchandise was 51.8%. M&S puts the value of customers who shop both departments at eight times that of those who do not.

But M&S’s clothing has been out of fashion in comparison with its food. Last year general merchandise like-for-likes fell 4.1% and in the first quarter of the current year the decline was 1.6%.

M&S has taken action to address its problems. Last year the team was rejigged as John Dixon moved from the top job in food to general merchandise and former Debenhams and Jaeger chief executive Belinda Earl was signed up as style director.

The first collection under the new team was this year’s autumn/winter range and there were encouraging signs. The product garnered enthusiastic reviews from the consumer fashion press and a big effort was made to improve the store experience for clothing customers.

Overhauled but not upgraded

In September the retailer unveiled new-look fashion departments incl-uding ‘welcome zones’ at the front of shops highlighting the new lines, made-over destination departments for product such as coats and dresses and more digital technology to add to the selection and purchase experience and recommend complementary items.

At the same time, the retailer signalled its determination to improve service. Marketing and business development director Patrick Bousquet-Chavanne revealed that the average customer spends 24 minutes in store and that most women shop its stores alone and therefore often want advice.

In response M&S put 10,000 womenswear staff through what it called ‘Fashion Camp’ training with the objective of delivering “world-class customer service”.

Bousquet-Chavanne said of the initiative at the time: “Once she [the customer] is in the store we have to provide an intuitive journey, not hard work.

“We have 24 minutes to inspire and convert her. We want that 24 minutes to be the best experience for her.”

However, since the launch of the new range, there have been reports of popular items being unavailable and M&S was affected - like other apparel retailers - by the weather. As the retailer was switching into autumn, the mercury remained stubbornly high.

Analysts believe that next week M&S will still not be firing on all cylinders on general merchandise.

Seymour Pierce analyst Freddie George said: “General merchandise results have been impacted by a number of factors including the warm weather over the last month and sizing issues relating to womenswear following the launch of the autumn/winter ranges.

“Although we believe the company is adopting the right strategy to revitalise womenswear and the autumn/winter ranges look better, we continue to have a number of concerns.

“Our recently downgraded forecasts indicate that the general merchandise problems are more deep rooted and will take longer than expected to fix.”

However, Bank of America Merrill Lynch analyst Richard Chamberlain maintained in his most recent note on M&S that he expects it next week to “reiterate its guidance for the full year and state that its new autumn ranges have been well received”.

He said: “We think M&S was more aggressive in its summer discounting as it wanted to clear inventory before the autumn season. Also, its mid-season Sale started a few days earlier this year.

“However M&S’ deeper and narrower buy should result in less markdown in half-two, meaning it can still move margin forward for the full year.

“On November 5 the attention is more likely to be on recent trading and we expect positive comments on the performance of new ranges, which only featured for three weeks of 13 in quarter-two but should boost performance [in the second half] versus softer comparisons, particularly in womenswear.”

Renewed focus on digital

There is also likely to be interest next week in how M&S’s multichannel business is doing as digital commerce becomes ever more important in retail.

That was evidenced last week when department store group Debenhams issued results, which showed online sales up 46.2% to account for 13.2% of the group total.

In its last full year, M&S’s multichannel sales rose 16.6% and online accounted for 13% of general merchandise sales.

In the first quarter revenues climbed almost 30% at Marksandspencer.com. The retailer is experimenting with
in-store digital initiatives, including internationally, and next year will switch online platforms, which is expected to enable further growth.

Although the retailer said at last week’s food briefing that its Food To Order business is now worth £130m a year, there is some disquiet that it insists it will not launch a fully-fledged online food offer.

Work still to do

The retailer and many industry observers believe that the differences between M&S’s typical food basket and that of the big grocers means selling food online is not viable.

However, Shore Capital has expressed some bemusement. The broker noted: “Management is poss-ibly overly sensitive to the understandable question as to why it is not considering online grocery, bordering on the intolerant.

“What is key is that the UK online grocery market is expanding by circa 15% per annum and it is skewed to younger and more affluent households - paradoxically perhaps, these are customers that M&S would love to walk its general merchandising offer.”

Shore concluded that “whether management likes it or not, investors should and will keep asking” why M&S will not embrace the channel for a fuller grocery retail offer.

As Bolland prepares for next week’s results, he will know that they are freighted with significance because of investor hunger to see improvement in general merchandise.

At the start of this year David Cumming, head of equities at one of the retailer’s shareholders, Standard Life Investments, warned that clothing had to come good or Bolland would be in the firing line.

Cumming said: “He has to get his autumn range right, that’s when the management changes that he’s made will have an impact.

“I think the market will wait to see how that range… is going to work.

If that is poor then he’ll be under a lot of pressure.”

Bolland has often argued that improvements to general merchandise will take some time to show through and, for those who believe share prices tell the business story, he seems to have some wind in his sails.

M&S’s shares have been on the up. At the time of writing its stock had risen just over 3% over a three-month period - a better showing than food rivals Sainsbury’s and Morrisons, but behind fashion competitors such as Next and Debenhams.

This difference perhaps sums up where M&S stands at present: food flying, still more to do in fashion.