Marks & Spencer (LSE: MKS) 3Q18 Update: Clothing Returns to Deep Declines, Food Underperforms

KEY POINTS

  • Marks & Spencer (M&S) reported weak comparable sales growth in its core UK divisions in 3Q18.
  • M&S’s UK Clothing and Home segment saw a 3Q18 comp decline of 2.8%, weakening from a decline of 0.1% in 2Q18.
  • Its UK Food division saw a 3Q18 comp decline of 0.4%, also down from a 0.1% decline in 2Q18, despite significant inflation in the UK grocery market.

3Q18 Update

Food, clothing and homewares retailer M&S reported weakening growth in 3Q18, ended December 30. The company’s core UK segments reported the following underlying performances:

  • The UK Clothing and Home segment reported a comp decline of 2.8% in 3Q18, down from a 0.1% fall in the prior quarter. 2Q18 comp results were unusual for being almost flat following a period of declines, as we chart below.
  • The UK Food segment reported a comp decline of 0.4% in 3Q18, also down from a decline of 0.1% in the prior quarter and in the context of an inflationary UK grocery market. Major grocery retailers such as Tesco, Sainsbury’s and Morrisons reported solidly positive comp growth earlier this week.

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Total UK comp growth came in at (1.4)% in 3Q18. Total group sales were down 0.1%, with international sales down 9.8% in constant currency, reflecting planned closures in some countries. Online sales were up by only 3.0% in the quarter.

CEO Steve Rowe said, “M&S had a mixed quarter, with better Christmas trading in both businesses going some way to offset a weak clothing market in October and ongoing underperformance in our Food like-for-like sales.” In clothing, Rowe pointed to “the impact of an unseasonal October,” which resulted in a revenue decline and meant that M&S carried more stock into its December sale.

  • For more on M&S’s five-year turnaround plan, please see our coverage of the company’s 1H18 results.

Outlook

M&S’s full-year guidance remains unchanged. At the half-year point, management provided the following guidance for FY18, which closes at the end of March 2018:

  • Food: an approximate 5% increase in space and a decrease of 75–125 basis points in gross margin.
  • Clothing and Home: an approximate 1.5% decrease in space and an increase of 25–75 basis points in gross margin.
  • An increase of 2.5%–3.5% in UK operating costs.
  • Capital expenditure of £300–£350 million.

For FY18, analysts expect M&S to increase revenue by 1.0%, to £10.73 billion. The consensus estimate calls for EBIT to fall by 4.0% and for adjusted pretax profit to fall by 5.9%. Analysts expect M&S to generate GAAP EPS of 22.7 pence in FY18, versus 7.2 pence in the prior year. These estimates were collated before the latest results announcement.

The company will report full-year results on May 23.