Marks and Spencer may have reported a stiletto-stumbling 13th consecutive decline in clothing sales, but shares were up more than 8% to more than 437p in early-morning trading. Clearly, investors saw something unexpected they rather liked in the retailer’s first half results.
It wasn’t revenues, which ticked up just 0.5% to £4.9bn in the 26 weeks to September 27th. Nor was it all down to the bottom line - underlying pre-tax profits were up 2.3% to £268m on an underlying basis, beating analyst predictions of £253m - but not by a mile. What, then, could it be?
It’s the burgeoning cash cow every retailer wants to milk, but the M&S heifer has actually dried up of late. M&S.com sales fell 4.6% in the second quarter - actually a big improvement from the 8.1% plunge the previous quarter, when customers defiantly turned their nose up at a new website, but not exactly something to get shareholders singing.
The sun may have long set on the empire, but Brand Britain is still a big seller overseas and M&S opened 23 new stores in the period, taking their total to 470 across 56 countries. Sales did rise 1.2% to £534m on a constant currency basis, but fell a rather more swingeing 3.4% when the strong pound (that old chestnut...) was taken into account.
M&S’ middle-class fodder has certainly been outperforming the price war-whacked grocery industry of late. Sales were up 1% on a like-for-like basis in the half and 3.6% when all its new stores (mainly convenience) were taken into account. But the like-for-like increase of 0.2% in the second quarter was in line with analyst expectations, so no nice surprises there.
Now we’re getting warmer - literally. Sales in the retailer’s general merchandise division, which includes clothing and homeware, were down 4% on a like-for-like basis in the latest quarter, while clothing itself fell 3.4%. As with rival Next, part of the blame - 2.5% of it - was placed with the ‘unseasonal’ warm weather in September (although, as chief exec Marc Bolland’s much-feted predecessor Sir Stuart Rose once said, ‘Weather is for wimps’).
What really pleased investors, though, is that womenswear seems to be finally finding its middle-aged groove under former Jaeger boss Belinda Earl, with sales up 1.3% in the first five months of the financial year (excluding sunny September of course).
There was also another pleasant surprise: general merchandise gross margin for the full year. That will be 100 basis points (bps) higher than previously forecast, at between +150 and +200bps, which the company attributed to cheaper sourcing and less discounting. As the Evening Standard's Chris Blackhurst points out, this latter may have a lot to do with Bolland's signing up of the Lindsey brotthers. Mark and Neal Lindsey are a pair of Asian based supply chain gurus, unknown outside the industry but feted within it for their cost saving flair. The uptick in margins also indicates that M&S's clothing is moving upmarket, implying that Bolland and his team have finally cottoned onto a more focused, profitable strategy.
Finally, shareholders like nothing more than a bit of cash, and the interim dividend was duly raised 0.2p to 6.4p. Not an Apple-style windfall, but certainly a sweetener. As independent retail analyst Nick Bubb put it, ‘The bull case for M&S has always rested on gross margin growth potential in Clothing and the scope for cash returns to shareholders, so M&S has delivered what they want today.’
Finally a sliver of good (or not-as-bad-as-expected) news from an embattled high street titan, then. But there are still several question marks over M&S’ - and Bolland’s - future. Can it get online sales going again? Will womenswear keep on growing and can that rescue the beleaguered general merchandise division?
And, as Sanford Bernstein analyst Jamie Merriman put it, ‘The big question for management now going into the second half is whether they can hold up gross margin and get some positive like-for-likes. I don’t see any sign of that yet.’