Struggling high street bellwether Marks & Spencer (MKS) is marked down 4.2% to 259.7p as full year results demonstrate the sheer scale of the challenges ahead, revealing another drop in annual profits along with further alarming falls in clothing and food sales.

Compounding the pain for long-suffering shareholders on Wednesday is the announcement of a deeply discounted 1 for 5 rights issue to raise £601.3m. This will fund Marks & Spencer’s 50/50 joint venture with digital grocer Ocado (OCDO), an expensive first foray into the food deliveries business.

STILL LACKING SPARK

‘Good progress in restoring the basics’ is the message from management today, although the market is voting with its feet as results for the year ended 30 March 2019 reveal key metrics moving in the wrong direction.

Pre-tax profit (adjusted for store closure costs and other charges) falls 9.9% to £523.2m on group sales off 3% to sub-£10.38bn, reflecting a 2.3% like-for-like sales decline in Food and a 1.6% drop in like-for-like Clothing & Home revenues. This is rather worrying, as you would expect same-store sales to be improving as shoppers transfer spending to surviving stores.

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Frustratingly, the British retail institution appears to have shot itself in the foot again on the fashion front. Following an encouraging third quarter, fourth quarter clothing sales were constrained by weak availability as Marks & Spencer sold out of popular lines and experienced supply issues.

A slide in overseas sales is hardly helping to foster positive sentiment, and while there’s a pleasing £280m reduction in net debt to £1.5bn, there is a savage 25.7% cut in the full year dividend to 13.9p, reflecting management’s previously announced decision to slash the payout and prioritise balance sheet strength.

IS ROWE RESTORING THE BASICS?

Chief executive officer (CEO) Steve Rowe, Marks & Spencer's Millwall Football Club-supporting boss nicknamed ‘Nails’ who has identified cost savings of at least £350m by 2020/21, comments:

‘We are deep into the first phase of our transformation programme and continue to make good progress restoring the basics and fixing many of the legacy issues we face. As I have said, at this stage we are judging ourselves as much by the pace of change as by the trading outcomes and change will accelerate in the year ahead.

‘Whilst there are green shoots, we have not been consistent in our delivery in a number of areas of the business. M&S is changing faster than at any time in my career - substantial changes across the business to our processes, ranges and operations and this has constrained this year’s performance, particularly in Clothing & Home. However, we remain on track with our transformation and are now well on the road to making M&S special again.’

GLOOMY GUIDANCE

Investors are also factoring in Marks & Spencer’s highly cautious guidance. In the year ahead, progress is ‘likely to be second half weighted’ and management also highlights volatile trading patterns in the opening seven weeks of the new financial year.

Shareholders are being asked to stump up cash to facilitate Marks & Spencer’s transformation too. The retailer is raising £601.3m through a rights issue priced at 185p – that is a chunky 31.8% discount to yesterday’s closing price - in order to fund the purchase of half of Ocado’s UK retail business, which will be supported by the Ocado Smart Platform technology, for an eye-watering £750m.

Bears will argue this is a very costly entry into an online groceries industry with questionable economics. This new business will trade as ‘Ocado.com’ and will gain access to Marks & Spencer’s product range, brand and customer database following the termination of Ocado’s current sourcing agreement with Waitrose in September 2020.

AN ENDLESS TURNAROUND?

AJ Bell investment director Russ Mould says: ‘Some stocks feel like they are permanently in turnaround mode and high street stalwart Marks & Spencer certainly falls into that category.

‘A succession of chief executives have tried and largely failed to restore its clothing division to former glories even if the food business has been a relative light amid the gloom.

‘Little wonder then that investors’ patience is starting to wear thin as these latest full year results see performance constrained by its restructuring efforts.

‘While the latest incumbent of the CEO’s seat, Steve Rowe, says the company is judging itself as much on the pace of change as trading outcomes, the market clearly sees things a little differently.

‘The numbers are also somewhat overshadowed by the £600m rights issue being used to finance its joint venture with Ocado.

‘This bold strategic step has not proved popular so far and necessitated the trailed cut to the full year dividend. While its food arm has done well, it is not really a supermarket, and this does beg questions of how it will translate to an online delivery model which most people currently use for their weekly shop. Still, this enduring retail brand needed to do something to remain relevant to today’s shoppers, time will tell if this was the right response.’

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Issue Date: 22 May 2019