Shares in high street stalwart Marks & Spencer (MKS) reversed early gains to trade down 3.7% at 109p on Tuesday after the firm released an unscheduled trading update for the 13 weeks to 8 August and revealed it planned to eliminate up to 7,000 jobs in the next three months.

Group sales over the period were down 13.2% as a 2.5% rise in food sales was offset by a 38.5% drop in clothing and home sales and a 24.6% fall in international sales.

Despite the glum numbers, M&S said trading was actually ahead of the scenario it outlined at the year-end in terms of revenue and cash generation.

FOOD RESILIENT

As usual the food business was the firm’s saving grace, with sales building steadily as customers adapted to more in-home eating and online ordering. In-store sales also improved as more locations opened during the quarter.

The firm is gearing up for its new supply deal with Ocado (OCDO) which starts next month and says it is already ‘beginning to see the benefits as planned in the form of trading terms and the launch of over 500 new products in M&S stores from the expanded online range created for the switchover.’

NON-FOOD IMPROVING

Clothing and home sales were inevitably weak due to store closures, but in the eight weeks since reopening the trend improved steadily with the 47.9% drop in in-store sales partially offset by a 39.2% increase in online revenues.

Sales have ‘varied widely’ across the store estate with newer out of town stores trading ‘close to last year’s level’ in recent weeks but legacy town centre stores and those in shopping centres still suffering from reduced footfall and social distancing.

The clothing sales mix has changed too with a steep drop in demand for formal wear and increased sales of casual clothing and leisure wear. While some surplus stock was reduced for quick sale, M&S has hired extra storage space to ‘hibernate’ surplus good stock for next year.

DIFFICULT DECISIONS

Despite the better than expected performance of the last 13 weeks, M&S still needs to right-size its clothing and home business to respond to what it calls a ‘material shift in trade’.

Therefore it is beginning a consultation process to cut around 7,000 jobs across its stores, the central support centre and in regional management. Most of the job losses are expected to be voluntary and through early retirement, and new jobs will be created to support the online business and its new ambient food warehouse, but it’s still unwelcome news for employees.

The firm will take a ‘significant’ adjusting item in its half-year results in November for the job cuts, which while painful are ‘an important step in delivering on our cost savings programme and ensuring we emerge from the crisis with a lower cost base and a stronger more resilient business.’

Retail guru Clive Black of Shore Capital, house broker to the firm, said ‘such difficult decisions from M&S are necessary and improve the chances of sustaining still high employment levels, economic activity, positive operational gearing and free cash flow generation in time.

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Issue Date: 18 Aug 2020