Marks & Spencer Group Plc chief Steve Roweâs strategy to reboot the retailerâs moribund clothing business got a cool reception from investors, with the stock falling the most in seven years amid concerns the plan will hurt short-term profits and doesnât address some key decisions.
The company will reduce styles to de-clutter its stores, cut prices on up to a third of its items by more than 10 percent and dial back promotions, it said in a statement Wednesday after conducting a six-week strategy review. Like-for-like sales in the unit that includes clothing declined 2.9 percent last year and wonât improve in 2016, while profits will be hurt by investments behind the plan. The shares fell 7.8 percent, the steepest drop since May 2009.
âAt first sight, there are no surprises in the Steve Rowe strategy, which is evolutionary rather than revolutionary,â Cantor Fitzgerald analyst Freddie George said. âThe fact that there is very little detail in the statement will be a disappointment. There is no easy fixâ for the clothing business, he said.
Rowe, who began working at M&S as a teenager, needs to stem a four-year slump in clothing sales thatâs seen market leader M&S lose share to everybody from fast-fashion pioneer Primark to grocer Tesco Plc. In his first seven weeks into the job, the 48-year-old has shaken up the executive ranks and made some new apparel items available to consumers as soon as they hit the catwalk. The moves revealed Wednesday didnât address the retailerâs U.K. store count or its struggling international business.
âRecovering our Clothing & Home business wonât happen overnight,â Rowe said in the statement.
M&S expects a short-term hit to its profits from its decisions to lower clothing prices and reduce promotional activity, as well as from challenging market conditions that sent retailer BHS Ltd. plummeting into administration last month. The company forecast sales in its clothing division to be similar to last yearâs drop, with gross margins in that business to expand by between 50 and 100 basis points. Margins widened by 240 basis points last year.
âA major downward revision to consensus estimates and deferral of the results of the strategic review seems a poor combination,â Tony Shiret, an analyst at Haitong Securities, said in a note. There was a âlack of clarity on key strategic issues â which we did not expect at this stage.â
The forecast means analystsâ consensus estimate for pretax profit this year will drop by about 12 percent, Simon Bowler, an analyst at Exane BNP Paribas, said by email. âThis will lead to a short-term hit, but hopefully for longer-term benefit,â Canaccord Genuity analyst David Jeary said in a note.
The company said it would wait until after the summer to address other issues, such as its embattled international unit — where profit plummeted 37 percent — and the size and structure of its U.K. store portfolio. M&S has 914 U.K. stores, of which 571 sell food exclusively and 302 sell a mixture of clothing and food. Internationally M&S operates 480 stores across 59 countries in Europe, Asia and the Middle East.
âThere is little we can see in the strategic review that hasnât been tried before at the company,â said Steve Clayton, an analyst at Hargreaves Lansdown.
Rowe is sticking to some of the shareholder-friendly policies initiated by his predecessor, Marc Bolland. M&S plans to increase its dividend by 3.9 percent to 18.7 pence this year. That compares with a Bloomberg forecast of 19.3 pence. Itâs also delivering a special dividend of 4.6 pence per share.
On the food side of the business, M&S plans to ramp up expansion of its successful Simply Food convenience outlets. In addition to the 250 stores the company plans to open by March 2017, M&S will open about 100 outlets in each of the following two financial years.
Underlying pretax profit rose 3.5 percent to 684 million pounds ($1 billion) in the 52 weeks ended March 26. That compared with the 674 million-pound analyst estimate.