M&S fails to please with Christmas sales - UPDATE

published 10 January 2013

Marks & Spencer was out of favour on Thursday following the release of its third-quarter trading update, which missed forecasts across the board.

The High Street giant was forced to release its statement late Wednesday night - earlier than planned - following the leak of like-for-like (LFL) sales figures to Sky News.

For the 13 weeks to December 29th 2012, group sales at a constant exchange rate grew by just 0.6%. However, LFL sales in the UK dropped by 1.8%, slightly worse than estimates, owing to weaker-than-forecast Food and General Merchandise (GM) performance.

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Shares were down 1.13% at 366.8p in afternoon trade.

Despite Food reporting record sales of nearly £330m in the two key Christmas trading weeks, outperforming the market by 4%, third-quarter Food LFL sales rose just 0.3%, worse than the +1.0% consensus forecast.

However, broker Panmure Gordon noted that the 'adjusted' LFL change (which includes New Year's Eve) was +0.9%, "which, we agree with the company, is a better assessment of the underlying performance". As such, the broker said that Food was "fairly decent, especially considering little to no price inflation".

As for GM, headed by a newly imported management team, sales fell by 2.2%, down 3.8% on a LFL basis, worse than the forecast decline of 3.5%.

The company also revealed on Thursday that it is to take a one-off finance charge of £75m this year, after deciding to buy back and cancel 30-year bonds issued in 2007.

Nevertheless, there was some good news on the margin front. While M&S reiterated its gross margin guidance - at towards the top end of the 0-25 basis-point growth range - it said that due to its strong focus on cost control, it now expects cost growth to be around 2%, below the prior guidance of 3-5%.

Brokers mixedAnalyst Freddie George from Seymour Pierce reacted to the trading statement by downgrading his 'low-end-of-the-range' full-year profit before tax (PBT) estimate by 3% from £665m to £645m. He also said he expects to make "more significant revisions" to next year's £715m forecast.

While the company blames its worse-than-expected performance on an increase in discount activity, George said: "We are concerned that the stores during the critical and important two weeks before Christmas would have had the footfall but did not get the spend."

Seymour maintained its 'hold' rating on the shares on Thursday, saying that the stock is "fairly valued". George said: "Marc Bolland will, we believe, be given another year to improve the trading performance of General Merchandise following recent management changes."

Nomura, on the other hand, said that the results broadly met its low-end expectations and has held its full-year PBT forecast at £666m. However, analyst Fraser Ramzan said he expects the consensus estimate (for a PBT of £674m) to "drift down". Nevertheless, Nomura kept its 'buy' rating.