M&S fails Christmas test

This isn’t just any retail decline, this is an M&S one. As expected Marks and Spencer suffered a bad fall in sales over the Christmas quarter and as such there could be serious question marks over Steve Rowe’s turnaround strategy if it fails to deliver soon. Total UK sales fell 1.4% on a like-for-like basis with both Food and Clothing & Home declining. FY guidance is unchanged as the likelihood of poor results were pretty well flagged back in November.

Consensus was actually for a slighter worse set of results so shares could creep higher with decent short interest in the stock. Nevertheless there is no repackaging these figures as anything short of very disappointing.

Food is the worry – it’s been the easy win for M&S for years but suffered a -0.4% LFL decline. Other grocers registered solid increases and crucially may be eating into M&S’s premium appeal – we have seen strong performances for Morrison’s, Sainsbury’s and Tesco’s premium ranges. Food store expansion will stay on hold.

Clothing & Home was -2.8% LFL. This has been declining for years and what M&S needs is to refocus on digital, which the newly announced tech transformation programme hopes to deliver on. A long overdue overhaul of the online services is required but at least it seems to be a priority for management.

The fact it did not participate in Black Friday speaks volumes. By contrast John Lewis – which has a first class online platform - had its best ever day, contributing to yet more excellent numbers for the department store – LFL +3.1% .

The market was getting nervy on M&S following the November half-year report but some decent numbers from food retailers in recent days and those announcements on IT and the new CFO boosted shares back to where they before that update.

The Christmas peak season year-ago comparison was always going to be a test; but M&S has failed badly. You could argue that comparisons would be tough since a year ago total UK LFL sales were +1.3% (Clothing & Home +2.3%, Food +0.6%). This was the toughest comparison for 22 quarters, but the 2015 Christmas trading period was exceptionally weak and M&S has been struggling for a few years and should be seeing LFL growth given we’re some way into Steve Rowe’s turnaround.

And while there is no word on margins, it is expected that M&S will see a decline in Food margins, although Clothing & Home should be firmer.

Tesco short of expectations

As flagged in Monday's note as a strong likelihood Tesco shares slipped badly despite positive figures – a trend we saw last year. Throughout 2017 we saw TSCO shares ramp ahead of trading updates and results on sky-high expectations, only for the shares to slide back on the release. TSCO dropped more than 4% in early trade. But while the stock is bought on the rumour and sold on the fact, it has found itself in a more steady uptrend since June.

There was lots to be positive about for Tesco as the Dave Lewis turnaround continues to yield results. Q3 was strong with like-for-like sales +2.3%, with a particularly good performance in Fresh Food, which grew by 3.7% in the UK.

Stronger grocery and fresh food sales offset a less impressive performance in general merchandise and slower tobacco sales following the Palmer & Harvey failure.

As with all the supermarkets, while top line growth is seen, we have scant detail on margins and inflation. Inflation is undoubtedly helping to push up sales figures, but it is less clear where margins are. We have noted Sainsbury’s struggles on that front in H1, Both Tesco and Sainsbury’s have not mentioned margins in their updates.

The likelihood – as Tesco suggests in its update – is that it is better able to absorb inflation and pass less on to consumers than rivals, which ought to be positive for margins on a relative basis with competitors. The takeover of Booker offers clear cost synergies in that regard going forward.


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