M&S warns of demand contraction as interim profits fall

UK food and clothing retailer Marks & Spencer on Wednesday said it expected a material contraction in demand over the next 18 months as it reported a fall in interim profit, but backed its customers to be more resilient than market assumptions.

The company said adjusted pre-tax profits fell 24% to £205.5m in the six months to October 1 as its food business bore the brunt of trying to maintain competitive prices by not passing on inflationary costs.

Chief executive Stuart Machin expected market conditions to become more challenging in the 2023/24 fiscal year. “The combined impacts of the cost-of-living squeeze and the most marked rise in the cost of doing business for many years are creating pressure on margins industry-wide,” he said.

Profits were also hit by the exit from Russia due to the war on Ukraine and a loss at online joint venture Ocado Retail. There was also no government Covid-related business rate relief.

Trading in the first four weeks of the second half was in line with forecasts, with clothing and home sales up 4.2%, food sales up 3% and international up 4.1%.

Half-year operating profit before adjusting items at the food unit fell to £71.8m from £124.0 as inflation hit 11%. However, sales rose 5.6% driven by growth in franchise and hospitality activity.

Clothing and homewares sales rose 14% during the period. Overall group revenue increased 8.5% to £5.5bn.

Machin said the cost-of-living crisis would result in unviable capacity leaving the industry, “creating opportunities for the leaner players who remain”.

“We believe that the M&S positioning and the accelerated change underway, give scope for greater resilience and we are very confident the business will emerge with a strengthened market position and prospects for growth,” he said.

“In highly uncertain market conditions, there is a large variation in plausible forecasts for customer demand. Whilst we are therefore planning on a material contraction in market demand the M&S customer may prove more resilient than some market commentators assume.”

He said M&S’s 30 million-strong customer base had slightly higher incomes and age demographics, with a high proportion in above average paid jobs or retired.

“Despite the recovery in demand since the pandemic and return to travel these age groups shielded more and many retain a savings cushion affording some resilience to the headwinds,” he said.

Third Bridge analyst Orwa Mohamad said M&S faced a challenging period with overall revenues for the UK grocery market expected to be flat or in decline over the next six months.

"Any growth in revenues is going to be driven by inflation. Margins erosion will continue for at least the next 12-18 months because of M&S’s positioning. M&S needs to absorb some inflation costs because it lacks the scale advantages enjoyed by the likes of Tesco. It will probably look to reduce promotional activity first," he said.

“The biggest challenge for M&S is shifting its image from an occasion shop to a weekly shop. There is a risk that large numbers of infrequent shoppers simply drop the brand from their repertoire as they trim back their discretionary spend.”

Reporting by Frank Prenesti for Sharecast.com