Tesco Boss Hails End of ‘Space Race’ as Profits Crash

Chief executive Mark Bolland says company moving in right direction as food sales lead good year for retailer

Sarah Butler

@whatbutlersaw
Wed 20 May 2015 08.47 BST Last modified on Sat 2 Dec 2017 18.04 GMT
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Marks & Spencer storefront
Marks & Spencer unveiled full-year profits of £661m, up 6% on a year ago. Photograph: Alamy
Marks & Spencer has delivered its first increase in profits since 2011 as a result of strong food sales and the first signs of an upturn in fashion sales and is planning to hand back £150m to shareholders.

The chain, which has been struggling with tough competition in its clothing business for years, unveiled full-year profits of £661m, up 6% on a year ago, and pointed to less discounting, better deals with suppliers and tight control of capital spending for the improvement. However, the annual profit is still well short of the £1bn reported in 1998 and 2008.

Marc Bolland, the chief executive who has been under acute pressure to provide evidence of a turnaround in the group’s fortunes, said he was very pleased with the performance.

He said the company’s food business had enjoyed an “outstanding year in a difficult market” and that M&S’s clothing and homewares division had significantly increased its profit margins even though sales of those ranges remained “below our expectations”.

“We are transforming M&S into a stronger, more agile business – putting the right infrastructure, capabilities and talent in place to drive our strategic priorities,” he said.

Total sales rose just 0.4% to £10.3bn. Clothing sales fell 2.5%, but that downturn was offset by a 3.4% rise in food sales. However, like-for-like sales of clothing rose slightly in the final quarter of the financial year after four years without growth.

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Bolland refused to declare a definitive turn in M&S’s fortunes but said the retailer had now completed the “heavy lifting” of investment and was now ready to deliver improving profits and on-going cash pay-outs for shareholders. Bolland has been pouring cash into new warehouses and IT systems in a bid to update the chain, which was still counting stock by hand when he took over.

“We know where we are going. This is clearly a step-by-step approach and this is a step forward and a step in the right direction,” he said.

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Asked if he would still be around in a year’s time to report on progress, Bolland, who has been criticised over the slow pace of reform at M&S said: “Absolutely. Is that clear enough?”

In a veiled criticism of his predecessor, Lord Rose, Bolland said M&S could have delivered a rise in profits earlier if he had ducked investment in new IT and distribution systems or in improving the layout of stores “as had been done in the past”.

“We have chosen to do this the hard way,” he said.

The high street retailer is to return £150m to shareholders via a share buyback and is also increasing its final dividend by 7.4%.

The company was able to signal a payout after increasing profit margins on clothing and homewares by 1.9 percentage points, thanks to better deals with suppliers and selling more goods at full prices. Profit margins also rose at the food business, which opened 62 new Simply Food outlets.

Results from the overseas business, a key plank of Bolland’s strategy, were more disappointing. Operating profits dived nearly 25% to £92m and sales slid 2% on a constant currency basis, amid political and economic difficulties in Russia, the Ukraine and Turkey. The company plans to open four more Simply Food outlets in Hong Kong and at least six more in Paris, but the chief finance officer, Helen Weir, said M&S was not expecting an improvement at its international business “in the near term”.

Sales also went into reverse at M&S.com, falling by 2% after problems at the group’s hi-tech distribution centre in Castle Donington.

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Bolland said he expected the clothing and homeware markets to remain “highly competitive”. But he said M&S would increase gross margins on its clothing and homeware ranges by between 1.5 to 2 percentage points as it improved its systems. The company is also confident it will improve clothing profitability by getting better deals with suppliers as it cuts out middlemen with the help of veteran sourcing experts, brothers Mark and Neal Lindsey, hired by Bolland last year.

M&S is also trying to lift sales by bringing more new ideas, better quality and more stylish design to shoppers as well as better availability of product.

“There could be quarters where [clothing sales are] slightly positive and quarters that are slightly negative, but we are not nervous about that because we know where we are going with gross margin,” Bolland said.

On the food side, M&S is stepping up expansion of its Simply Food chain. The company now plans to open 250 more of the small local stores in the three years to March 2017, compared to 200 it had promised previously.

Analysts said M&S’s performance was in line with expectations but agreed with Bolland that it was too early to be certain that M&S had turned a corner. Tony Shiret, an analyst at BESI, said that the current levels of in-store and online promotions suggested clothing sales were still “ unexciting”. He added: “It would be wrong in our view to overinterpret these results as being ‘all the problems are sorted’.” Shiret described M&S’s £150m payout to shareholders as “more emblematic than meaningful”.

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