Marks & Spencer clothing sales return to growth in fourth quarter

In the fourth quarter Marks & Spencer delivered its first growth from clothing and general merchandise for 14 quarters, with like-for-like sales up 0.7% and the gross margin maintained.

Helped by heavy investment in its website finally paying off and food delivering another strong performance amid the current cut-throat UK grocery environment, group sales rose 1.9% in the 13 weeks to 28 March.

The market had been expecting GM sales to fall and food to be flattish.

Chief executive Marc Bolland boasted of strengthening cash generation as he gained a stronger control of costs, with guidance on operating cost growth for the full year being cut from circa 2.0% to nearer 1.5%.

"We have made strong progress over the quarter," Bolland said. "In food we delivered another excellent performance, with sales growth ahead of the market."

M&S's like-for-like food sales stepped up since the company's Christmas update, building on the 0.1% in the third quarter with a 0.7% increase in the fourth, outperforming expectations of a flat outcome amid a tough grocery market. Total food sales were up 3.7%, from the 2.8% seen in the third.

After a scratchy start for the new website, derided by the City after the considerable funds poured in, M&S.com finally contributed some growth, with sales rising 13.8% in the period.

But most impressing the market will be general merchandise and womenswear growing total sales 1.3% as, Bolland said, customers recognised "continued improvement in product quality and styling".

Gross margin improvement within general merchandise remained on track, with guidance unchanged at growth of 150-200 basis points for the full year as full price sales increased and discount participation was slightly lower.

A downside, which may largely be overlooked due to the impressive performance elsewhere in the group, was that developments in Russia, Turkey and Ukraine dragged international sales down 3.8%, though not as bad as expected. Management cautioned of a significant impact on second half profitability, which will eat into some of the progress in the UK.

Shore Capital analyst Clive Black hailed the "rather distinctively anticipated" results with a "Hallelujah!"

Following completion of the company's £2.5bn modernisation phase, M&S is "operating an interesting business model to our minds", he said. "In particular, if better trading can come through in higher margin GM, then there is the prospect of positive operational gearing finally emerging on a more efficient central cost base. As such there is scope for margin expansion and very strong free cash flow, a resource that could bolster solvency ratios and make for shareholder friendly initiatives."

Despite the GM surprise, Investec's Kate Calvert said she was maintaining her full year pre-tax profit forecast of £646m due the international challenges.

But she added: "The shares have re-rated and now trade at a circa-8% sector discount, but we believe they still have further to go, especially if upgrades start to come through in the second half of the year.

"We see a material gross margin opportunity in general merchandise, driven by better buying, lower markdowns and general efficiencies."