January 3, 2014 / 4:31 PM / 5 years ago

M&S and Tesco's Christmas sales set to disappoint

LONDON (Reuters) - Marks & Spencer (MKS.L), Britain’s biggest clothing retailer, and Tesco (TSCO.L), the country’s largest grocer, are expected to report weak Christmas trading, adding to pressure on management to end a run of poor results.

Christmas decorations adorn the exterior of retailer Marks and Spencer's flagship store in London's West End, November 5, 2013. REUTERS/Andrew Winning

The trading statements on Thursday, as well as updates next week from grocer J Sainsbury (SBRY.L), home furnishings retailer Dunelm (DNLM.L), sports retailer JD Sports Fashion (JD.L) and baker Greggs (GRG.L), will also shine a light on prospects for consumer spending and the broader British economy.

Retailers are likely to echo comments on Friday from Next (NXT.L), Britain’s No. 2 clothing retailer, which forecast a continued, steady improvement in the economy but a lack of growth in household incomes that meant there was no reason to expect a significant increase in consumer spending in 2014.

Next also cautioned that a return to economic growth was likely to result in higher interest rates which in turn would moderate the spending of consumers with home loans to repay.

Marks & Spencer is forecast to report sales of general merchandise - clothing, footwear and homewares - in a range of flat to down 1.5 percent at shops open over a year in the 13 weeks to December 31, its fiscal third quarter, according to analysts who published forecasts after the company stepped up promotional activity in December.

That outcome, against weak comparable numbers in 2012, would follow nine straight quarters of declining like-for-like sales in general merchandise.

Analysts are also concerned that gross margins will have been hit by pre-Christmas discounting, putting pressure on their 2013-14 consensus pre-tax profit forecast of 651 million pounds.

PRESSURE ON INCOMES, BAD WEATHER

Marc Bolland, chief executive since 2010, has denied that the reception of M&S’s autumn/winter ranges, the first from a new clothing team, will make or break his stewardship of the company.

M&S shares have risen 12 percent over the last year on hopes of a recovery and Bolland says the company is on the right track now that decades of under-investment are being addressed.

Like Debenhams DEB.L, Britain’s No. 2 department store operator, which warned on profits on Tuesday, he is likely to point to unprecedented promotional activity in the clothing market, declining high street footfall, continued pressure on household incomes and unhelpful weather.

However, those points may not convince investors, who have already seen positive updates from Next and department store market leader John Lewis JLP.UL.

M&S’s upmarket food business, which contributes over half of sales and about a third of profits, is performing much better, with analysts forecasting third-quarter like-for-like sales up 1.1-2.5 percent. However, even that outcome would be a slowdown from the second quarter’s 3.2 percent growth.

While Britain’s big grocers traditionally cope better in tough times thanks to their focus on essential goods, they are finding growth hard to achieve.

For market leader Tesco, analysts forecast like-for-like sales, excluding fuel and VAT sales tax, down 0.5-2.5 percent for the six weeks to January 4.

That compares with a third-quarter fall of 1.5 percent and could add to concerns over the progress of CEO Phil Clarke’s plan to reinvigorate the world’s No. 3 retailer given that over 1 billion pounds has already been invested.

In the UK, Tesco is being squeezed by hard discounters Aldi ALDIEI.UL and Lidl LIDUK.UL and upmarket grocers such as Waitrose.

Sainsbury, battling Wal-Mart’s (WMT.N) Asda to be Britain’s No. 2 grocer, has posted 35 consecutive quarters of underlying sales growth.

That run could end on Wednesday, with analysts forecasting third quarter like-for-like sales, excluding fuel, in a range of flat to down 1 percent.

Reporting by James Davey; editing by Tom Pfeiffer

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