M&S says downturn to last longer

Marks and Spencer issued a shock profit warning and said the consumer downturn was likely to be deeper and last longer than previously expected, sending its shares plunging 25 percent to a near seven-year low.

The clothes, food and homewares group said on Wednesday sales at UK stores open over a year fell 5.3 percent in the 13 weeks to June 28 and its upmarket food business had lost market share as cash-strapped shoppers switched to cheaper rivals.

In a trading update rushed out a week earlier than planned, it said Steven Esom, head of food, was leaving after just one year in the job and that it would look at more initiatives like its "Dine In for 10 pounds" campaign to lure back custom.

The sales plunge, which Executive Chairman Stuart Rose described as "effectively an earnings downgrade", heaps pressure on Rose a week before a shareholder vote to confirm his move up from chief executive, against corporate governance guidelines.

"Regrettably we feel that the credibility of senior management has been irreparably damaged by both the degree of profit erosion . and the lack of any clear idea from management that they have a grip of problems," Credit Suisse analysts said in a research note.

Rose told reporters he was very confident of being approved as executive chairman, and said other retailers would follow suit with profit warnings.

"I can't believe this is a Marks & Spencer (M&S) exclusive problem, I think this is definitely a retail slowdown and we don't know where it's going," he said on a conference call.

Kaupthing analysts agreed, and shares in rivals such as clothing group Next and supermarket chain J Sainsbury also fell.

"A raft of downgrades appears likely," they said.

But Panmure Gordon's Philip Dorgan said the "terrible" trading update was "at least half M&S specific," arguing its food business lacked scale, was threatened by premium ranges at supermarkets and was high price and also high cost.

M&S's update adds to signs indebted shoppers are cutting back on luxuries amid rising fuel, food and mortgage costs.

Industry data from TNS Worldpanel last week showed that sales at discount supermarket group Aldi surged 21 percent in the 12 weeks to June 15 on the same period the year before, while more expensive rivals like M&S and Sainsbury lost ground.

Rose said the consumer downturn was likely to be "longer and harder fought" than previously expected.

"This is certainly going to go right through into 2009. There is absolutely no sign of relief," he said.

PROFITS PLUNGE

Analysts slashed M&S profit forecasts for the year ending March 2009, which had stood around 870 million pounds, with some cutting to as low as 640 million. That compares with profits of over 1 billion pounds in the year ended March 2008.

M&S shares closed down 24.5 percent at 240 pence, off a near seven-year low of 238 pence and valuing the company at about 3.9 billion pounds. The cost of insuring M&S's debt against default also rose sharply, a trader said, while credit rating agency Fitch cut its outlook on M&S to "negative."

M&S, which serves 21 million customers a week from over 600 stores in the UK, said like-for-like general merchandise sales fell 6.2 percent in the 13 weeks to June 28, but that it was holding market share in clothing and outperforming in homewares.

Same-store sales in the group's food business were down 4.5 percent and Rose said M&S was losing market share here.

Shore Capital analyst Darren Shirley said that, factoring in food inflation of about 3-4 percent, this equated to a "truly awful" decline in like-for-like volumes of about 8 percent.

Esom, a former Waitrose executive, will be replaced by John Dixon, who worked in M&S's food business for several years before taking up his current post as head of homewares. Esom was promoted to the M&S board as recently as March.

Rose said Dixon would have a remit to look at how to adapt M&S's food offering to more price-conscious shoppers, but denied the company was going downmarket and ruled out introducing a budget range of foods.

"We may have to, in the very, very intensive food price war that's going on at the moment, have a slightly different stance," he told analysts on a conference call, adding that this would focus as much on innovation as promotions.

M&S shares have fallen around 60 percent over the past year and are trading well below the 400 pence level at which retail tycoon Philip Green attempted to buy the firm in 2004.

Rose was brought in to defend M&S against that bid, and then presided over a recovery that lifted the shares to as high as 759p in April 2007.

"I think we were a weak business in a strong market back in 2004. We're definitely a stronger business in a very weak market at the moment," Rose said. "We will come out of this, but in the meantime I think we're going to have a pretty tough run."

Corporate governance consultancy PIRC last week urged shareholders to vote against Rose's election as chairman.