May 17, 2019 / 3:08 PM / 7 days ago

M&S to feel transformation pain before profit recovery

LONDON (Reuters) - Profit at Marks & Spencer is expected to fall for the third year in a row next week, with underlying sales poised to slip as the British retailer works through a painful “transformation plan”.

FILE PHOTO: Shoppers walk past at a branch of the British clothing and food retailer Marks and Spencer on Oxford Street in London, Britain, January 3, 2019. REUTERS/Toby Melville/File Photo

M&S set out on its latest turnaround, which follows a decade of failed reinventions, shortly after retail veteran Archie Norman joined as chairman in 2017 to work alongside Steve Rowe, who became chief executive in 2016 and has been with the company for almost three decades.

The 135-year-old mainstay of British shopping streets said in May last year it was targeting sustainable, profitable growth in three to five years by closing weaker stores, re-shaping its clothing and food businesses, cutting costs and investing in technology.

M&S wants to make at least a third of its clothing and home sales online by 2022 and as part of its transition struck a 1.5 billion pound online food joint venture with Ocado in February, giving it a home delivery service from September 2020 at the latest.

But the plans have yet to have an impact its shares, which are down nearly a third over the past two years, once again putting M&S in danger of dropping out of the FTSE 100 which it has been a member of since the index began in 1984.

Once a British institution, M&S has fallen out of fashion over the last decade and its recovery is being hampered by difficult market conditions, particularly in clothing.

“LAGGING PEERS”

“The UK apparel market still looks under pressure, and Kantar data suggests M&S full price sales have been lagging peers. Not all of this seems due to the space closure programme,” UBS analyst Andrew Hughes said.

Analysts on average expect M&S to report a pretax profit before one-off items of 519 million pounds for its year to March 31, 2019, down from the 581 million pounds made in 2017-18.

They are forecasting a fall of 1.4% in like-for-like clothing and home sales, while like-for-like food sales are forecast to be down 2.4%, partly reflecting management’s moves to make the business more competitive by cutting prices.

“The downward trend to estimates is clearly unhelpful for M&S and needs to be slowed and reversed for the shares to perform,” analysts at Barclays said.

M&S is financing the cost of the Ocado deal by raising up to 600 million pounds in a rights issue, with details due to be revealed after next week’s results, as well as a 40% dividend cut, with a reduced final dividend for 2018-19 of 7.1 pence.

Reporting by James Davey; Editing by Alexander Smith

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