Setback for M&S as clothing sales dip

London - British retailer Marks & Spencer reported a dip in first-quarter underlying sales in its clothing, shoes and homeware business on Tuesday, a setback after a return to growth in the previous three months.

However, the 131-year-old mainstay of Britain's shopping streets said it remained on track to grow profit margins this year - a key target for its general merchandise business.

Shares in Marks & Spencer (M&S), which also sells groceries, have risen a quarter over the last year on hopes the billions of pounds spent by Chief Executive Marc Bolland on revamped products, stores, logistics and the website will pay off.

They gave up early gains to be down 1.3% by 10:50 after M&S updated on trading ahead of its annual shareholder meeting at London's Wembley Stadium later in the day.

"Whilst it is disappointing that management has not been able to sustain the positive general merchandise trading momentum ... we are reasonably comfortable that the slowdown broadly reflects slowing market conditions in UK apparel," said Shore Capital analyst Darren Shirley, who has a 'buy' rating on the stock.

M&S said it was keeping its guidance for the 2015 to 2016 financial year, including growing gross margins in the general merchandise business by 1.5 to 2 percentage points.

Bolland has stressed his non-food strategy is to primarily focus on gross margins, the difference between the price it buys goods and the price it sells them, through improvements in its sourcing operations, rather than driving sales growth.

"What we have said very consistently is the priority is on gross margin and we're delivering," he told reporters.

Some analysts, however, remain concerned about weak sales.

"Increasing gross margins alone is not a source of long-term growth," said Credit Suisse analysts, who have an 'underperform' rating on M&S shares and note a firmer US dollar could hurt clothing retailers' margins in the coming quarters. Many fashion retailers buy goods from factories in Asia, priced in dollars.

M&S said general merchandise sales at stores open over a year fell 0.4% in the 13 weeks to June 27.

That was better than analysts' average forecast for a 1% decline, but below 0.7% growth in the previous quarter - the division's first growth in nearly four years.

Bolland said an unseasonally cool May hit the whole industry, leading to widespread promotions in June.

Official data, published last month, attributed a sharp slowdown in British retail sales growth in May to shoppers buying fewer clothes.

Bolland said the general merchandise business was, however, benefiting from a focus on improving quality and style.

He also highlighted growth of 38.7% at M&S.com, re-launched last year.

First quarter like-for-like sales in M&S's food business rose 0.3%, a 23rd straight quarterly rise and in line with forecasts.

In May M&S reported a rise in annual profit for the first time in four years and analysts are forecasting another rise for 2015 to 2016.