LONDON (Reuters) - British retailer Marks & Spencer (MKS.L) said improving profit margins and steady market share showed its struggling clothing business was on the mend, despite a 10 percent drop in annual profit and falling sales in the latest quarter.
However the company, which also sells upmarket food, said on Wednesday it did not anticipate a tough trading environment improving any time soon.
"We've not had, nor do we expect to have, any help from the markets in which we operate," Chief Executive Steve Rowe said, noting that inflation was starting to outstrip the pace of pay rises.
Nevertheless, M&S's turnaround plan - "a self-help story" - remained on track, he told reporters.
"Whilst it's still early days and there is much to do I'm pleased with our progress," he said, pointing to a stabilizing market share in clothing, an increase in market share for full price clothes and the removal of excessive discounting.
Shares in M&S, which have increased 20 percent in the last three months - partly reflecting the recruitment of industry heavyweight Archie Norman as its new chairman - rose by as much as 2.6 percent.
"We think like-for-like (sales) in general merchandise will surprise to the upside this year as M&S continues to implement change," said analysts at Peel Hunt, who have a "buy" rating.
Rowe, a 27-year company veteran, became CEO a year ago, taking on the task of reviving a British institution that has fallen out of fashion over the last decade.
He has set out a plan to turn around M&S's clothing business by driving improvements in the quality, fit and availability of its ranges, while lowering prices and reducing promotions, moves he said last year would dent short-term profit.
Rowe is also working to switch UK shop floor space from clothing to food and reducing exposure to loss-making international markets by closing stores in 10 countries.
M&S made a pretax profit before one-off items of 613.8 million pounds ($796 million) in the year to April 1 on total revenue up 2.2 percent to 10.6 billion pounds.
That was ahead of analysts' average forecast of 593 million pounds, but down from 690 million pounds in 2015-16, reflecting lower clothing and homeware sales and higher costs.
Pretax profit fell 63.5 percent to 176.4 million pounds after restructuring charges of 437.4 million pounds, although the dividend was maintained at 18.7 pence.
M&S's fourth quarter sales were hit by Easter falling outside the quarter and by the key days of the busy post Christmas sale coming in the third, rather than fourth, quarter.
Clothing and homeware like-for-like sales fell 5.9 percent in the period, worse than analysts' average forecast of a 3.3 percent decline. They had increased 2.3 percent in the previous quarter.
But Rowe was pleased with the performance, noting calendar effects chopped 3.8 percent off the clothing and homeware number and that full price sales had risen by 8 percent in the quarter.
Fourth quarter like-for-like food sales fell 2.1 percent versus an analysts' consensus of down 0.6 percent.
After the clothing and homeware gross margin rose 105 basis points in 2016-17, M&S forecast it in a range of up 25 to down 25 basis points in 2017-18, with the firm mitigating the impact of a weaker pound with better sourcing and less discounting. The food margin was forecast at flat to down 50 basis points, reflecting cost inflation.
Editing by Kate Holton/Mark Potter/Alexander Smith