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Marks & Spencer Suffers Losses and Soft Sales on Road to Transformation

Marks & Spencer is at the early stages of a transformation plan to dramatically overhaul its business and is feeling the pains necessary to the process.

In a Nutshell: Fresh off its announced plans to close 100 stores by 2022, moving the company toward its goal of generating a third of its sales from e-commerce, Marks & Spencer reported a decline in profits and a slight gain in sales for its latest fiscal year.

M&S acknowledged the complications and long road ahead for its transformation plans. It continues to face headwinds such as the continued migration of clothing and home online, the development of global competition, the growth of home delivery in food and the growth of discounters, which “all amount to threats to our business and market position,” the company noted. Combined with a challenging U.K. consumer market, M&S said it needs to “modernize its business” and “reignite” its culture, noting that accelerated change will be the only way forward.

The U.K.-based retailer, which had 1,035 stores in the U.K. at the end of March, as well as 300 clothing, home and food shops, and 39 outlets, said its supply chains in Clothing & Home and Food “require significant upgrades.” The upgrades are necessary, M&S said, “so that we can be faster to market, reduce high stock levels in clothing and improve availability and waste in food.”

While online sales are growing, the company noted its e-commerce capability is behind its best competitors and its website is too slow. Its fulfilment center at Castle Donington has struggled to cope with peak demand and some of its systems are dated, M&S noted, adding, “In both businesses, we need to revitalize our ranges and reassert our reputation for value for money.”

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But M&S said it’s making changes, with the first phase of its transformation aimed at restoring the basics–“getting the architecture and infrastructure of the business fit for the future.”

“We have made a rapid start with the enabling steps to deliver our ambition of reducing costs by at least 350 million pounds [$467.41 million] and provide a platform for growth in later phases of our plan as we improve our ways of working and reduce unnecessary waste,” the company noted. “We have accelerated our store estate program and are on the way to closing some 25 percent of our legacy Clothing & Home space…The website is being improved and we are investing to increase and improve e-commerce capacity, including at our Castle Donington site in order to support our ambition to double the online share of our Clothing & Home sales to over 33 percent.”

M&S noted that it is building a new retail distribution center at Welham Green and teams have been established to address the supply chain issues in both main businesses to deliver on greater speed and lower costs.

Sales: Group revenue for the year ended March 31 inched up 0.7% to 10.7 billion pounds ($14.29 billion). Clothing & Home revenue was down 1.4% due to planned removal of two clearance sales and unseasonal second-half trading conditions. M&S said its customer base has narrowed and it has lost market share of younger customers. The retailer is taking steps to recover that demographic group in Clothing & Home by reducing the number of lines and phases, buying more stylish product in greater depth and emphasizing value. In 2017-18, M&S said it grew customers for the first time in five years.

Earnings: Profit before tax and adjusting items fell 5.4% to 580.9 million pounds ($775.77 million) from 613.8 million pounds ($819.71 million) a year earlier, impacted by a decrease in Food division gross margin. The company noted significant adjusting items of 514.1 million pounds ($686.57 million), including 321.1 million pounds ($428.82 million) for its U.K. store closure program. International profit before adjusting items more than doubled to 135.2 million pounds ($180.56 million) thanks to the exit of loss-making markets and favorable currency effects.

CEO’s Take: Steve Rowe, Marks & Spencer CEO, said: “At our half year results in November, I outlined the need for accelerated change at M&S. The first phase of our transformation plan, restoring the basics, is now well under way and the actions taken have increased the velocity of change running through our business. These changes come with short-term costs, which are reflected in today’s results. There are a number of structural issues to address and we are taking steps towards fixing these. The new organization will largely be in place by July and the team is now tackling transforming our culture to make M&S a faster, lower cost, more commercial, more digital business. This is vital as we start to leverage the strength of the M&S brand and values across a family of businesses to deliver sustainable, profitable growth in three to five years.”