Marks and Spencer, often seen as a barometer for wider trading conditions in the retail sector in the UK, today (22 May) reported mixed annual results. Sales and gross margin from food was higher but challenges remain elsewhere in the business and the retailer also cut the top end of its group sales forecasts.

Sanford Bernstein analysts Jamie Merriman and Anthony Sleeman

"Marks & Spencer reported FY 2011/12 underlying operating profit of GBP810m, 2.5% ahead of consensus of GBP790m and underlying profit before tax of £706m, 2% ahead of consensus of £694m. M&S's earnings beat was driven by strong cost control, with UK operating costs up 1.5% (£20m) versus the latest guidance of up c. 2%, though we note that cost inflation more than offset the £30m of gross benefits which were achieved through operational improvements.

Going forward, we expect that the food business will continue to deliver gross margin improvements on the back of systems improvements, but expect flat gross margins in the general merchandise segment, given continued price investment and the highly promotional environment in apparel, which we expect will offset any savings from improved systems.

"While we are encouraged that Marks & Spencer has reduced capex spending, our expectations remain  below the company's revised sales growth targets. Our analysis suggests that share gains would be needed in order to achieve management's sales goals; however, we expect this to be difficult, given M&S's already strong position in apparel and recent share loss in food."

Charles Stanley analyst Sam Hart

"M&S reported a resilient set of full year results, which were slightly ahead of expectations. The outcome reflected a combination of subdued underlying sales growth, gross margin pressure and good control of operating costs. Outlook comments from chief executive Marc Bolland were cautious.

"Consumer confidence is expected to remain low and particularly sensitive to periodic spikes in petrol prices. Consumers are prepared, however, to spend around special events and management sees potential for sales to benefit from forthcoming events including the Diamond Jubilee and Olympic Games. We expect trading conditions in UK General Retail to remain tough in 2012/13, with the consumer continuing to experience pressures and the competitive environment intense.

"M&S is likely to be amongst the more resilient retailers, however, reflecting the bias of the customer base towards older demographics and more prosperous socio-economic groups. Significant self-help opportunities also exist, particularly in the areas of on-line, International and supply chain efficiency."

Investec analyst Bethany Hocking


"Underlying PBT of GBP705.9m is a c.2% beat to consensus, but the beat is entirely due to the contribution from M&S Money (c.£10m higher than consensus and our forecast) and a lower Interest charge line. A change in the treatment of the pension will result in c.£17m additional interest costs going forward, so consensus will come down to reflect this. As expected, the long-term targets have been downgraded.



"Overall, there is nothing so far that makes us change our view, Sell. While a reduction in capex due to downgraded space growth guidance will increase cash flow, it will also decrease outer year forecasts. We remain sellers with a DCF-based 295p target price."



Conlumino MD Neil Saunders



"While these results are not terrible, neither are they particularly stunning. In our view, there is a degree to which they show M&S is happily muddling along in the middle and is finding it increasingly difficult to generate strong growth from the UK business.

"Behind the headline figure, the business remains a game of two halves. Food is seeing good progress with some strong results in both total and like-for-like performance. Meanwhile, general merchandise sales are far weaker and performance across the range is patchy.

"Looking ahead, M&S has much more work to undertake if it is to accelerate growth, and nowhere is this truer than in clothing. While M&S has made some good progress on home and food we feel it still lacks a clear sense of direction on the clothing front, especially in womenswear. Until this is remedied growth in both sales and profits will remain under pressure."