M&S plunge adds to retail gloom

By Rachel Sanderson and Laurence Fletcher

LONDON (Reuters) - Marks and Spencer reported its worst quarterly performance in two years on Wednesday and warned the pain for retailers could extend into 2009, sending its shares down 21 percent and weighing on the sector.

The retail bellwether shocked investors with a 2.2 percent fall in sales at UK stores open at least a year during the crucial Christmas period, after lowering prices across the board to lure shoppers spooked by the credit crunch.

"Dreadful numbers," broker Panmure wrote in a research note as several analysts cut profit forecasts and questioned whether Marks and Spencer would achieve its long-anticipated pretax profit of 1 billion pounds this financial year.

The stock suffered its largest fall since entering the benchmark FTSE-100 in 1983, touching a two-year low of 398 pence at one point. Analysts had expected zero to 1 percent growth.

"In this market you just can't afford to disappoint. The moves have been exaggerated because everyone is so downbeat," Rensburg Fund Management's Colin Morton told Reuters. But Morton added he thought the stock's plunge was excessive, and he was holding on to his shares.

Chief Executive Stuart Rose, who has staged one of retail's most notable turnarounds in his three years at Marks and Spencer, said British businesses were facing a "real crunch" as their costs, such as fuel bills, were rising, but weak consumer spending meant they were unable to raise prices.

He warned that tough trading could continue into 2009 and called for a rate cut, adding to pressure on the Bank of England. The central bank cut interest rates for the first time in two years last month and faces a tricky decision whether to cut again on Thursday.

Rose defended his decision to hold onto market share by lowering prices by 6 percent across homeware and clothes, including deep cuts in the price of top-end cashmere.