M&S’s profits tumble as consumers tighten belts

By Simon Evans and Jesse Loncraine
Sunday, 28 September 2008

Sir Stuart Rose, chairman and chief executive of Marks & Spencer, will reveal a disastrous slump in fortunes this week – in a seven-day period set to be one of the toughest yet for the UK retail industry.

On Tuesday, Tesco chief executive Sir Terry Leahy is expected to tell the City that growth at Britain’s biggest retailer has slowed as consumers spend less. The City is also bracing itself for further high-street fallout on Wednesday, when retailers have to pay their final-quarter rent. Many are predicting a glut of failures.

On Thursday Sir Stuart will spell out the decline at M&S, with both food and non-food sales set to have slumped by more than 7.5 per cent in the second quarter of the year. First-half pre-tax profits are likely to fall to below £300m from £452m last year.

Nick Bubb, retail analyst at Pali International, said the poor results would force the retailer to cut back its expansion plans. He warned that a cut in the company’s dividend next year was unavoidable and added that a continuing decline would “inevitably lead to management change”.

Shares in M&S fell again last week to 228p after Morgan Stanley, the company’s house broker, softened up the market with the warning of bad news. Some analysts were furious, arguing that Morgan Stanley’s statement was a de-facto profits warning.

Over at Tesco, Sir Terry is expected to say that like-for-like second- quarter sales growth came in at 4 per cent. One analyst said: “The numbers will be solid if unspectacular. Margins are holding up well because a lot of their suppliers are taking up the slack. Sir Terry will be keen not to over-egg things. It’ll be interesting to hear what he says about the debt, which is pretty hefty.”

M&S and Tesco’s results will follow a catastrophic week for retailers. Last Friday Rosebys, the furnishing chain, fell into administration after a loan from one of its key backers was pulled. Meanwhile the fate of MFI hangs in the balance, with the firm’s management team thought to be attempting a last-ditch buyout.

Shares in JJB Sports collapsed by 50 per cent last week as the firm’s auditors hinted that its long-term viability was in the balance and disclosed it was in talks with its bank, HBOS, over its covenants.

Meanwhile, concerns about Woolworths’ future continue as the firm’s new chief executive, Steve Johnson, struggles to turn around the ailing group.