Profits at M&S only seem to have gone backwards since Marc Bolland took over as chief executive, but could a big step forward now be not too far away?

Profits at M&S only seem to have gone backwards since Marc Bolland took over as chief executive, but could a big step forward now be not too far away?

Many people like to hark back to the sunlit uplands of 2007, when M&S scraped a pre-tax profit of £1bn under the leadership of Sir Stuart Rose, but Marc Bolland pulls no punches now when he talks about his shabby inheritance back in 2010, with M&S’s chronically inefficient supply chain, uninspiring stores, poor online capability and unclear market positioning.

Of course the banking system collapse in 2008 hasn’t helped anybody relying on consumer spending in recent years and it could be argued that the famous £1bn profit at M&S was an illusion, based on unsustainably high food margins and unsustainably low capital expenditure and depreciation charges.

If Marc Bolland had actually said that when he took over as chief executive and warned that profits would go nowhere for, say three years, while he fixed “20 years of under–investment in infrastructure” in a tough UK marketplace, then investors might well have been sympathetic. Instead he set out some grandiose plans to grow the sales of the business and now has to try to claim that good underlying progress is being made against the (subsequently revised) plan.

If, as it says today with the final results, M&S made “strong progress” in the last financial year, despite the disappointing profit setback, it is tempting to wonder how it will describe a year when it actually produces some modest profit growth.

Looking back at the 2011/12 year, when profits went nowhere, the headline was “Marks and Spencer performed well in a challenging economic environment and made good progress in delivering our strategy”, whilst back in May 2011 the PR spin for another lack-lustre year of profits was “Good year with growth in market share in all areas”.

The great American investment guru Warren Buffett once said, in the context of fund management groups, that “I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull’s-eye around wherever it lands”.

In M&S’s case, it often looks as if management have painted the profits bull’s eye around wherever they have ended up and it perhaps goes without saying that the “underlying” £665m pre-tax profit declared today for 2012/13 (before pension adjustments) was struck before some large exceptional costs, including a one-off £75m cancellation cost for the 2007 Bond. A circa £15m hit for PPI provisions at the M&S Bank (which will rise to as much as £45m this year) also goes below the line, as will the £30m double-running costs on the new E-commerce distribution warehouse and systems this year.

But having been picky about the disappointing profits at M&S over the last couple of years (which are in stark contrast to the relentless progress at the likes of Next and Primark), it’s only fair to say that the business is getting closer to the pay-off time for all its recent investments.

M&S are confident about seeing gross margin growth of circa 30/50basis points this year, thanks to the supply chain work, and though operating cost growth will pick up to 3.5% (albeit finance director Alan Stewart has cried wolf about this before) it won’t need too much sales growth, against some very soft comparatives in general merchandise, to see pre-tax profits limp back above £700m in 2013/14.

If the much-vaunted autumn/winter womenswear range is well stocked and well merchandised and well marketed, then M&S might even do better than make £700m in profits this year.

But it’s not that prospect that has driven the share price up by 5% today and got investors excited. It is the prospect that from 2014/15 onwards, once M&S are through their peak of capital expenditure spending, free cash flow will improve dramatically and that surplus cash will be returned to long-suffering shareholders via share buybacks or higher dividends.

Of course, the world isn’t standing still while M&S complete their business transformation and competition may well erode the bottom-line gains that hope to bank, but in three years time M&S could be in a radically better shape and that prospect of the sunlit uplands of 2016 now seems to have secured the embattled Marc Bolland in his job for the time being, having secured the public backing of his chairman Robert Swannell.      

There is just one caveat, which is that many M&S stores still look very uninspiring relative to the competition and it remains to be seen whether the ambition to limit capital expenditure to £550m a year in the future is compatible with what still needs to be done to make the stores more pleasant places to shop in.

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.