Marks & Spencer is changing rapidly – hiring and firing, opening its eyes to digital and shutting up shops. But will that translate to meaningful improvement?
M&S has been a hive of activity in recent months with departures, hires, redundancies and store closures all coming thick and fast.
For many smaller, less complex retailers, such initiatives might represent the bulk of a transformation plan. For the behemoth that is M&S, they are a drop in the ocean.
In an exclusive interview earlier this year, M&S chief executive Steve Rowe told Retail Week that the retailer was at the start of a marathon.
“This is not a job finished, this is a job just started,” he said. “We have a lot of work to do and it is going to be a hard slog. If this is a marathon, you have to understand we are on mile three or four, that is it. We still have 20-odd miles to go.”
That Rowe sees the scale of the challenge clearly is hugely positive. That he is confident enough to give it boundaries is also a good indicator. His predecessor Marc Bolland always refused to say just how long the “journey” he was taking M&S on would be.
“20-odd miles are easier planned than executed. You can see that from M&S’ interim results six months ago and its Christmas trading”
Still, 20-odd miles are easier planned than executed. You can see that from M&S’ interim results six months ago and its Christmas trading, which can be best summed up as disappointing.
Next week, investors will hope to see signs that M&S is at least staying on the track.
In M&S’ first half, adjusted pre-tax profits – ie, those which reflect how performance is judged internally – fell 5.3%. Across both its divisions of food, and clothing and home, like-for-likes declined 0.3%.
Broker consensus is that annual pre-tax profits will rise 225% on last year’s figure and 17% versus two years ago – that’s on an unadjusted basis.
If M&S does indeed achieve those numbers, investors can feel encouraged, but it’s worth noting that there has been a lot of change to the transformation programme over the past six months and so an adjusted pre-tax figure could reflect associated costs.
But the top line will need to show signs of improvement too. At November’s interims, Rowe maintained that clothing and home was a robust and profitable business – although both total sales and like-for-likes looked pretty shocking over the last seven quarters.
The market will need to see continued improvement to be convinced of any meaningful change.
The formerly resilient food division has also begun to find life tougher – like-for-likes slipped 0.4% in the third quarter. Total food sales rose 3.6% over that quarter, but that growth came from new stores.
Now that M&S is opening fewer Simply Foods and closing more full-line stores rather than reconfiguring space as was initially planned, food growth may well stall over the coming year.
What’s more, margin has suffered over the past year. Investors will want to hear how M&S plans to take advantage of current declining food price inflation and to know there has been progress on the ‘recalibration’ of price architecture and product.
That will revolve around more high-quality staples and fewer specialist products – more top-quality ham sandwiches, fewer Korean buns, as chairman Archie Norman put it back in November.
“There has even been market chatter about whether Norman is the person in the driving seat and, if so, what that might mean for Rowe”
Investors will also be anxious to see how M&S plans to cope in a grocery market going through consolidation. HSBC analyst Paul Rossington penned a note warning that the Sainsbury’s-Asda merger shows that “scale is critical in food retailing”.
He said synergies from the deals between Asda and Sainsbury’s, Tesco and Booker and Co-op and Nisa – as well as ongoing collaboration between Morrisons, Ocado and Amazon – would see M&S’ rivals reducing prices. He downgraded M&S to ‘hold’ as a result.
The relationship between Norman and Rowe will also be under scrutiny next week. Norman, who took over from Robert Swannell just over six months ago, has certainly been making waves – many of the new appointments have connections to him.
There has even been market chatter about whether Norman is the person in the driving seat and, if so, what that might mean for Rowe.
Investors will want to check that all is well in the boardroom and that the relationship between the pair is on an even keel – if they thought otherwise, they might be concerned about the implications for the turnaround story.
Ultimately, M&S will need to show it is progressing away from the volatility which has often characterised it in recent years and deliver sustained improvement over more than the odd quarter to win the market over.
The old one step forward, two steps back dance that the business has sometimes made its own needs to be clearly shown to be a thing of the past.