M&S profit falls for third straight year

London - British retailer Marks & Spencer posted a 3.9% fall in annual profit, a third straight decline, with three years of heavy investment yet to revive its underperforming non-food business.

Britain's biggest clothing retailer, which also sells homewares and upmarket food, said on Tuesday it made a profit before tax and one-off items of £623m in the year to March 29.

That compares with analyst forecasts of £600-630m, with a consensus of £615m, and £665.2m made in 2012-13.

But the company's shares fell as much as 3.8% after it warned that a new website would take four to six months to "settle in", affecting the performance of its general merchandise business in the three months to the end of June.

"Nothing's gone wrong," said chief financial officer Alan Stewart when asked about the website, a pillar of M&S's intended transformation into an international retailer reaching customers through stores, the web and mobile devices.

M&S is trying to shake off criticism that its clothes are dowdy, with its new strategy focusing on higher quality and more fashionable styles that satisfy its core customers aged 45 and over while also appealing to younger shoppers.

Chief executive Marc Bolland has spent £2.3bn in the last three years to push through the changes and address decades of under-investment.

He has overseen a redesign of products and stores and overhauled logistics to serve the new internet platform that went live in February.

But a new clothing team he set up in 2012 has so far failed to deliver a durable pick-up in sales and, for the first time, M&S earned less in the year to the end of March than its faster growing rival Next.

Full-year sales of £10.3bn - up 2.7% from a year earlier - were well below a revised target that Bolland set in 2012 of £10.8-11.5bn.

"They're telling the right story in terms of spending coming down and return of cash to shareholders, but the underlying trading is no great shakes," said one M&S shareholder.

The general merchandise division, made up of clothing, footwear and homewares, has posted 11 consecutive quarters of underlying sales declines. Profits have been propped up by 18 straight quarters of growth at M&S's food business.

M&S said the general merchandise gross margin would grow by about 100 basis points in 2014-15 due to a more efficient supply chain, while its food gross margin was expected to grow by 10-30 basis points as a result of further operational efficiencies.

It forecast a "significant" improvement in the general merchandise gross margin in the following two years and a further "step up" beyond that as the benefit of heavy investment in logistics flows through.

M&S said an improvement in clothing sales in the fourth quarter had continued in its stores, while its food business continued to outperform the market.

"Over the last three years we have transformed many parts of our business, investing to strengthen our foundations and improve our customer offer. We are now focused on delivery," Bolland told reporters.

Return of cash

The 130-year-old company, which serves 21 million shoppers a week from over 750 UK stores, said capital expenditure would fall from £710m in 2013-14 to £500-550m in each of the next three years.

"This gives potential for any excess cash to be returned to shareholders on a regular basis," Bolland said.

M&S held its dividend at 17 pence and said it was committed to maintaining a progressive dividend policy with dividends broadly twice covered by earnings.

Analysts said M&S's forecast of 4% overall cost growth in 2014-15 was a bit higher than some had hoped.

Tony Shiret, analyst at Espirito Santo Investment Bank, said he was disappointed by M&S's results statement.

"We expected firmer indications on capital repatriation, a better general merchandise gross margin recovery than now indicated and we note the comments on online 'settling' in the early year," said Shiret, who has a "neutral" rating on the stock.