This week’s results from Marks and Spencer (LSE: MKS) make one thing clear: the group is struggling to adapt to today’s retail environment. In a world where cut-price fashion rules and traditional physical stores have a tough time competing with online-only retailers, M&S is being left behind.
Indeed, for the six months to October 1 fell the group’s operating profit fell 17% compared with the same period a year earlier, to £231m, on just-about-flat revenues. Statutory profit before tax slumped 88.4% year-on-year and basic earnings per share declined 91% for the period, to 1p. Free cash flow, my favourite metric for measuring company performance, fell 32% to £174m and net debt increased by 2%.
Higher pension costs are to blame for some of the hit to profits. The company is closing its UK defined benefit pension scheme at a cost of £154.2m, and a further cost of £25m is expected over the next three years.
Store overhaul
The most shocking part of its results release, however, is the company’s decision to shut a large number of UK and overseas stores.
As the retailer tries to rebalance itself away from clothing and towards food, which has been the faster-growing part of the business in recent years, it will stop selling clothes at 45 UK locations, replacing its existing full-line outlets with much smaller Simply Food stores. There will also be full-line store closures. In total, the UK portfolio restructuring will touch more than 100 stores and will result in a net reduction of around 10% of Clothing & Home space with 60 fewer full-line stores.
At the same time, management is looking to open a further 200 Simply Food stores by the end of 2018/19 and the group is taking an axe to its international stores. The international business sank to a £43m loss in 2016. Overall, the overhaul to the company’s store estate will take five years and cost £350m.
The end of M&S as we know it?
Management’s decision to overhaul the store portfolio could signal the beginning of the end of the group’s Clothing & Home division. It’s telling that while the company is choosing to shut 10% of its fashion and interiors capacity, foods will expand with food retail space to grow significantly over the next four years.
Whether or not this restructuring will restart growth remains to be seen. The bill from store closures and new openings will put pressure on group cash flows for the next few years and there’s no guarantee that food will be the company’s saviour. The update yesterday showed food like-for-like sales down slightly and even the UK’s leading food retailers have struggled to find growth during the past few years. While M&S’s food ops have outperformed the sector recently, there’s no guarantee this will continue. As Tesco, Sainsbury’s and Morrisons have all found out, increasing retail space doesn’t necessarily translate into higher sales.
Overall, the changes announced at M&S this week only serve to increase uncertainty about the company’s future.