LONDON (Reuters) - Retailer Marks & Spencer reported a bigger-than-expected drop in non-food sales in the Christmas quarter after deciding to offer fewer discounts just as Debenhams and other rivals were offering more.
In a third-quarter update, rushed out late on Wednesday after trading data was leaked to Sky News, the company said sales of clothing, footwear and homewares slumped 3.8 percent in the 13 weeks to December 29 at UK stores open more than a year.
That compared with analysts' forecasts in a range of up 0.5 percent to down 3.5 percent and a second-quarter decline of 1.8 percent. The sales look weak when set against recent updates from Next, John Lewis and Debenhams.
"Our general merchandise performance is not yet satisfactory," Chief Executive Marc Bolland told reporters in a hastily convened conference call.
He said he was confident steps being taken by a new general merchandise management team, led by former food boss John Dixon, would address this, though he reiterated that the new team would not make a major impact until M&S launches autumn/winter collections in July.
"We know what we have to do on general merchandise," he said.
Bolland was asked if he was considering his position as CEO. Finance Director Alan Stewart replied: "Mark has the full support of the board. The shareholders are supportive of the strategy."
Like-for-like UK food sales rose 0.3 percent, compared with analysts' forecasts of down 0.8 percent to up 1.5 percent and an increase of 1.6 percent in the second quarter.
Total UK like-for-like sales fell 1.8 percent, having been flat in the previous quarter.
"We had a policy to protect margins on general merchandise," said Bolland, pointing out the retailer was 7 percent less promotional this year than last year, carrying 5 percent less stock into its post-Christmas sale.
The company, a mainstay of British town centres and best known for reasonably priced but high-quality staples such as socks and underwear, would decide "quarter to quarter" whether to maintain this policy.
MARGIN GUIDANCE MAINTAINED
M&S maintained its gross margin estimate for the 2012-13 year at towards the top end of a flat to up 25 basis points range. It also forecast cost growth of around 2 percent - better than a previous forecast of about 3 percent - which will partly offset any shortfall in general merchandise sales.
"The impact of disappointing clothing sales will be largely offset by the surprisingly robust gross margin outcome and the extra cost savings, so full year profit forecasts are unlikely to drift very far beyond the bottom end of the current market range," said independent retail analyst Nick Bubb.
Bolland is in the third year of a three-year plan to make M&S an international, multi-channel retailer that connects with customers through stores, the Internet, tablets and mobile phones.
The retailer is spending 2.4 billion pounds over three years on store revamps, logistics, IT and systems, along with selective investment overseas.
In May Bolland slashed the company's three-year sales growth target, blaming the recession, and in July he shook up his general merchandise management team after the group reported its biggest quarterly sales drop in 3-1/2 years.
M&S said international sales rose 4.1 percent, bolstered by good demand in India and China, while sales through the Internet rose 10.8 percent over the same period.
Many retailers are finding the going tough as consumers, whose spending generates about two-thirds of Britain's gross domestic product, fret over job security and a squeeze on incomes. With the retail market showing minimal growth, retailers are battling to steal market share.
An industry survey on Tuesday said underlying British retail sales rose just 0.3 percent year-on-year in December. That is well below the rate of inflation, suggesting stores sold less in real terms, and increases the chances that the economy contracted in the last three months of 2012.
Shares of M&S, up 20 percent over the last year, partly reflecting takeover speculation, closed on Wednesday at 366 pence, valuing the business at 6 billion pounds.
M&S, which attracts 21 million Britons a week to its over UK 700 stores and has nearly 400 stores in 44 countries overseas, said it remained cautious about the outlook for the year ahead.
The company had been due to update the market on Thursday.
Bolland said M&S did not know the source of the leak. "We are not very happy ... It's a very unfortunate incident," he said.
(Reporting by Brenda Goh and James Davey; Editing by Louise Ireland, Leslie Adler and Steve Orlofsky)