Marks & Spencer withdraws from Russia and warns of falling cost of living
Marks & Spencer (MKS.L) will close 32 stores as the company moves from multi-story buildings to more modern locations on the outskirts of the city with better access and parking.
M&S said its sales growth would slow due to the cost of living and announced that it would withdraw completely from the Russian market following the invasion of Ukraine.
The retailer has already closed 68 traditional full-line stores and 19 smaller grocery stores and expects 32 more closures.
“We are currently developing a growing pipeline of branch relocations. We are moving from old multi-storey buildings, which often have poor structural integrity and poor access and parking, to modern, well-located locations wherever this is possible within a renewal format with omnichannel capability.
“The pipeline for full-range retailers already includes around 15 new stores over the next three years, including seven former Debenhams sites, and we expect this number to increase further. This may result in a further 32 stores being closed.”
Some examples were given: “The relocation of Thurrock from the back of an underperforming centre with no accessible parking to the former Debenhams site next to the bus station with extensive parking is expected to cost £8.4 million net and pay for itself in two years.”
“The announced closure of the old four-storey store in Colchester town centre and the opening of a new modern store in the retail park on the outskirts of the town will cost £7.3 million net, resulting in an estimated payback period of 3.2 years.”
The retailer reported pre-tax profits of £392 million ($491 million) for the fiscal year ending April 2, compared to a loss of £209 million the previous year.
However, M&S expects sales growth to slow due to rising costs and increased pressure on customers’ budgets.
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“The business is now significantly better positioned and has had an encouraging start to the year. However, given increasing cost pressures and consumer uncertainty, we do not currently expect to make further progress from this lower profit base in 2022-23,” it said.
The 138-year-old clothing and food group said its struggling clothing and home textiles business was back on track for growth during the year, with sales up 3.8 percent compared to two years ago, before the full outbreak of the pandemic.
This was due to a 55.6% increase in online sales, while stores fell by 11.2%. The group’s food division, meanwhile, reported a 10.1% increase in sales.
The company added: “While this is encouraging, we expect the impact of falling real incomes to intensify in the second half of the year and persist for at least the remainder of the financial year.”
Richard Hunter, Head of Markets at Interactive Investor, said: “M&S’s figures are positive in many respects, but there is still a lot of work to do before the company can regain its previous status and profits.
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“Despite all the progress, the share price has been held back by a number of factors and given the guidance commentary, this may continue to be the case. Quite apart from the impact of falling real incomes amid persistent inflation, M&S has highlighted a number of headwinds that will result in a lower profit base for the current year. These include further investment in Ocado’s retail capacity, the absence of any revenue from Russia following its withdrawal and the absence of any business tax relief.
“Shares are up 55% since pandemic lows, but stripping away that recovery, the picture is less positive. Shares have fallen 46% over the past three years and are down 16% in the past year, compared with an 11.5% decline in the broader FTSE250 (^FTMC). Market consensus on the shares remains cautious, and the general view that the shares represent a hold position leaves the call open as the company continues to try to revive its fortunes.”
Rising food, energy and fuel costs are putting pressure on household budgets and inflation, the rate at which prices rise, reached 9% in April – the highest level in 40 years.
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M&S also announced that it was withdrawing from its Russian franchise business following the invasion of Ukraine.
The retail giant’s Russian branch, run by Turkish franchisees, operates 48 stores and employs 1,200 people.
The company stopped deliveries to stores in March, but has now announced that it will “completely exit its Russian franchise stores” and face cost losses of £31 million as a result.
Following the presentation of the results, CEO Steve Rowe will step down after six years at the helm of the group. He will be succeeded by food chief and co-chief operating officer Stuart Machin.
Mamta Valechha, equity analyst at Quilter Cheviot, said: “M&S provided a mixed update this morning and unsurprisingly warned about the consumer outlook, which will serve as a reminder of the pressures facing UK consumers.
“The Group currently assumes that profit will not improve in the 2023 financial year. Profit is already at a lower level than last year, which means a cut in estimates in the low to mid-single-digit range.”
Ross Hindle, analyst at Third Bridge, added: “As M&S continues its transformation programme, shareholders should continue to reap the benefits. However, a concern remains over M&S’s clothing offering, which once again finds itself in no man’s land between affordable and quality clothing.”
“Management shares the City’s concerns about inflation and its impact on UK consumers’ purchasing behaviour. As such, the next 12 months will be challenging for all retailers as they battle for market share and margins.”
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