The best way to sum up Marks and Spencer's (LON:MKS) Q1 sales is disappointing. Not only did the clothing and homeware sector see another 1.2% drop in sales, the second consecutive decline, but the all-important food sector also saw a decline in sales, dropping 0.1%, whereas estimates had looked for a pick-up of 0.6%. Unsurprisingly, the share price has dropped 3p at the UK open, as investors lose confidence in the outlook for the UK high street stalwart.
Turnaround plan going nowhere fast
Steve Rowe, M&S’s CEO, has implemented a 5-year turnaround plan, however, M&S isn’t going anywhere according to these results. Analysts are blaming the fact that Rowe’s plan means that there is no clearance sale at M&S these days, which is hitting sales, also some are questioning whether his plan is not only too expensive, but it doesn’t go far enough since he is only planning to close 53 stores nationwide.
M&S victim of weak economic outlook
The economic backdrop is not in M&S’s favour, as consumers get squeezed on the back of rising inflation and weak wage growth, which is eating into spending power. The future also looks fairly bleak. Barclaycard released data this morning showing a 2.5% drop in consumer spending last month, as higher prices meant that consumers concentrated on the essentials.
The Barclaycard survey found that only 33% of people said that they felt confident in the UK economy, which was the lowest level in 15 months, while nearly half of people surveyed said that they feel the pinch from rising inflation. This does not bode well for M&S’s future sales outlook, which may only get worse on the back of a hobbled UK consumer.
M&S food: could do better
Perhaps more worrying is that analysts are starting to question whether M&S is falling behind its peers, particularly in food sales, which fell 0.1% on a like-for-like basis, below rivals such as Sainsbury (LON:SBRY) and Tesco (LON:TSCO). CEO Rowe blamed the weak performance in food on higher food inflation and also new food store openings cannibalising existing outlets, which should have a temporary impact on sales. He also argued that the overall UK clothing market was more promotional than a year ago, which is hurting M&S, however he seemed confident that like-for-like clothing sales should move into positive territory later this year.
And the good news…
There were some pockets of good news, in the food department M&S is gaining market share overall, and full price clothing sales were ahead of the wider UK market. However, the good news isn’t enough to disguise the for M&S, which could hinder sales growth for some time to come and is largely out of the executive board’s hands.
Results unlikely to boost M&S share price
Overall, this isn’t the start of M&S’s turnaround plan that the executive team wanted, and it may take another few quarters before it can deliver some good news to the market. However, along with other retailers in the clothing and homeware sector, M&S cannot magically cause inflation to disappear and wages to go up, so the outlook for sales is largely out of their control. More important for the retail sector will be the next few months’ worth of wage data. If this continues to come out on the weak side then we could see retailers continue to struggle. One area where M&S could do better is on the food side, where it is unacceptable that it is falling behind its rivals. The market will be looking for a very quick turnaround in food sales, and if M&S fails to deliver on food then its long-term stock price could suffer.
The immediate market reaction has been to sell M&S shares on the back of this news, and the share price continues to linger below the 20-day moving average, which is a bearish sign. The problem with these results for investors’ is that there is still a lot of uncertainty about the future outlook, and there is only a limited amount of work that Rowe and co. can do to mitigate weak wage growth and rising inflation. These results do not change the overall picture for M&S’s stock price in our view, and due to this we continue to think that there will be a bias to the downside, with key support at 320p, then the September 2016 lows at 307p.
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