Another year, another unwelcome fall in retail bellwether Marks & Spencer’s annual pre-tax profits.
While group revenue grew a modest 2.2% to £10.6bn during the same period, on the back of translation gains in exchange rates and a welcomed growth of 4.2% in its food division, group pre-tax profit fell a staggering 63.5% to £176.4m.
The £306.9m dent in group pre-tax profit over the year to April 2017 is largely due to M&S’ strategic programme in building the business for the future – including adjusted costs associated with its store rationalisation programme in the UK, and the reduction of its international store base as it plans to close owned stores in 10 markets.
And of course, the effect of a further 2.8% fall in its clothing and home sales cannot be ignored.
Despite the British retailer assuring the city that profit levels were within its expectations as it makes “costly but necessary decisions,” chief executive officer Steve Rowe also reported that gains are not likely to show through until 2018/19, suggesting another challenging year lies ahead for Marks and Spencer.
2017-18 estimates based on 7% increase in food and 1-2% decline (-1.5%) in clothing.
Ultimately, the retailer aims to create a more productive footprint with lower costs, which will see the business reduce clothing and home space by 1 to 2% during its current financial year, while increasing its food space by 7%.
But before the rationalisation programme in the UK comes to an end, it expects to undergo additional costs of around £350m over the next five years before the business can see the full effects come into fruition.
Such circumstances prompt consideration of whether Rowe is doing enough to protect profits and mitigate the effects of the increased costs until then.
“But such small, although encouraging improvements, are making very little positive impact on the group’s top-line figures”
One thing is for sure though, Rowe understands M&S’ strengths no longer lie in its clothing offer, and is instead right to place a higher focus on driving spend through its food division.
But he is correct to recognise that there must still be relentless effort within its clothing offer, because 75% of his customers shop across both food and fashion.
However, while the business has continued to make improvements in product availability and maintaining competitive price points, any changes have yet to plump its sales on a year-on-year basis.
Yes, full price sales in its general merchandise division rose a promising 2.7% during 2016/17, and yes, this had a positive impact on the division’s gross margin by 105 basis points, but such small, although encouraging improvements, are making very little positive impact on the group’s top-line figures.
One year of a dip in sales may be acceptable, two years can be blamed on consumer uncertainty in a weak economy or the weather, but after six consecutive years of declining sales in its clothing and home division, it’s clear the problem goes beyond just the product’s styling, authority and quality in which the business has tried to improve for so long.
There really is no wonder that Rowe is implementing costly changes to the business.
As M&S slowly reduces store space for its clothing and home collections, this must be swiftly complemented by a decrease in the volume bought, while also eliminating the deadwood in the range if it has any chance of ensuring better productivity in stores during the time being.
It’s just a shame for M&S that Rowe didn’t come in sooner with his plan, as he will most likely have to wait another five years to see the full effect.