Marks & Spencer half-year update: What the analysts say

“Gross margin gains in clothing offsetting underwhelming sales performance. Food continues to hold a stable position and work on physical expansion. The general merchandise sales position is still affected by structural issues – failure to make sufficient inroads into younger markets in particular – as well as this season’s weather factors, which were better than last year, but still not cold enough to sell lots of coats.

“Overall this is a stronger than expected out-turn especially on the gross margin on general merchandise. We have picked up on recent discussions with Next that buying conditions in the Far East are softening more rapidly than previously anticipated and this may reflect in part confirmation of that. The other takeaway is that M&S is clearly prioritising gross margin and margin generally over sales, which continue to be weak in general merchandise and neutral in food. In UK food the negative gross margin is disappointing but at this stage is not a concern, so long as it reverses.” – Tony Shiret, Haitong Research

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“We‎ cannot deny that we would much rather be writing about stronger general merchandise trading from M&S, so seeing through the positive momentum that commenced at the start of calendar 2015. However, we have been in this position many times before, and it was not to be.

“Management is running the business effectively given trading conditions in our view and seeking to balance the performance effectively for its stakeholders. The group performance is also hindered by international challenges, where M&S is not alone.

“Against these constraints M&S has a cracking food operation where underlying performance is strong in a difficult UK market with sustained gains in market share, alongside what we deem to be aforementioned good capital management, which provides us with comfort.

“While we wait patiently for a sustained improvement in general merchandise same-store performance, we must bang the investment case drum with one hand behind our backs. In doing so though, we do not overlook the potential prize nor the M&S stock’s sound and arguably more visible and sustainable income stream with capital expenditure running at measured levels.” – Darren Shirley, Shore Capital

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“Not the easiest of halves given the weather, but the increased flexibility in M&S’s business model stands out – enabling it to deliver first-half pre-tax profit 5% ahead of consensus driven by general merchandise gross margin improvement. Management appears to be more confident on the general merchandise gross margin opportunity overall.

“While general merchandise like-for-like sales did deteriorate from -0.4% in the first quarter to -1.9% in the second quarter as management focused on full-price sales,gross margin was ahead +285bps. This is due to bringing forward some buying gains from supply chain changes, but the message is that management believes the overall opportunity is bigger as not much progress was made on markdowns. M&S.com sales were up 34.2% showing last year’s re-platforming issues are behind it.” – Kate Calvert, Investec

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“Profits may be up, but this progress has come at a dangerously high price – M&S has begun to sacrifice quality in its core womenswear battleground.

“For a brand that owes its totemic position among the middle classes to a hard-earned reputation for quality, shaving quality in the name of cost-cutting risks sowing the seeds of destruction.

“All vagaries of fashion aside, one of the key reasons for M&S’s 130 years of survival is its consistent quality. To put this formula at risk in an attempt to keep up with fast-growing rivals like Next borders on folly, and it’s no wonder the brand’s head of clothing, John Dixon, jumped ship this year.

“M&S’s successful food business continues to be a useful ‘get out of jail’ card, but its ability to save the brand’s skin is being undermined by food deflation. With like-for-like food sales up by a paltry 0.2%, the weakness in the clothing operation is becoming ever more exposed.” – John Ibbotson, Retail Vision

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“We flagged on Monday that the City had been softened up for another weak sales performance from M&S general merchandise in the second quarter ahead of today’s interims and Q2 update. The outcome was indeed as bad as feared at -1.9% like-for-like – despite the big online sales recovery.

“But M&S is quick to attribute that to reduced discounting and ‘a decision to focus on full price sales’ and have been able to come in with a general merchandise gross margin increase of +285bps in the first half, which is better than expected, thanks to strong sourcing gains and have increased their full-year margin growth guidance.

“Thanks to that strong general merchandise gross margin, M&S have therefore been able to beat first-half underlying pre-tax profit expectations and deliver ‘good’ growth of 6% to £284m, despite a big hit to international profits – albeit there is a chunky £68m exceptional charge, mainly for store impairments.” – Nick Bubb, independent analyst