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Marc up

4 November 2015 By Robert Cole

Marks & Spencer has fashioned big operational improvements – especially in non-food. The UK retailer increased gross margins of profitability in its main general merchandising business in the six months to Sept. 26 by 2.85 percentage points. But Chief Executive Marc Bolland needs to do more if he wants the M&S share price to perk up.

That’s not to say investors haven’t noticed an improvement of late. M&S shares are up 30 percent since its guidance last year that general merchandise gross margins would grow by between 1.5 and 2 percentage points. The shares rose again on Nov. 4 after M&S said it thought margins could be between 2 and 2.5 percent wider. Since the new guidance is below what the retailer achieved in the half, it is possible that M&S could better its revised target.

Some of the margin gains come because M&S is using its size to drive harder bargains with suppliers. It is also making more of its clothes in-house. That reduces delivery times and means it is easier to increase volumes of popular lines while reducing the risk of stocking unwanted products. That, in turn, suggests M&S has to flog off less stuff in clearance sales.

Given M&S’s niche is supposed to be quality, it’s important the margin gains aren’t coming from buying in lower quality clothes. Bolland says the reverse is true: it is adding 9 percent to the wool-weight of its cashmere cardigans, for instance. That should help M&S preserve pricing power. Still, the 1.2 percent fall in like-for-like general merchandising sales in the half suggests that Boland’s refashioning of M&S is incomplete. It may also be easier to revamp M&S’s internal mechanics than to excite the external agents in this equation: the shoppers.

Eikon data shows that M&S shares trade at an 18 percent discount to the European retail sector, when compared on forward earnings. To secure a more lively rating, M&S will have to find ways to get more customers to its website and into its shops.



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