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Falling Apparel Sales Drag M&S to First Public Loss

Fashion sales were hard hit by the coronavirus lockdown in the first quarter, handing Marks & Spencer its first reported loss as a public company.

In a Nutshell: M&S’s clothing and home sector was heavily impacted by the coronavirus pandemic in the first quarter, with total revenue falling 40.8 percent for the first half, sending the chain to its first reported loss for the six months ended Sept. 26.

The 136-year-old company, which was publicly listed 94 years ago, is in the midst of “Never the Same Again,” an initiative transforming the retailer into a lean, digitally oriented operations. Part of the plan, instituted in May, includes a “substantial acceleration in the reshaping of Clothing & Home,” reflecting both lower demand but also the need to move to more popular faster moving mainstream product,” the company said. The launch of “MS2,” its new integrated global digital, data and online business division, is expected to enable its Clothing & Home division to compete online and maximize the e-commerce opportunity. The aim is to achieve an online sales mix of at least 40 percent over the next three years.

M&S installed Richard Price as Clothing & Home’s managing director, while new supply chain director Paul Babbs will reduce costs and improve stock flow by integrating the supply and sourcing teams.

For its Autumn and Winter assortment mix, the retailer has reduced its stock keeping units and eliminated slow-moving merchandise. It also concentrated its supply with fewer, higher-quality suppliers to better balance quality and cost price, M&S said. The assortment mix reduction was 20 percent for the current season, reflecting a 30 percent reduction from 2018 levels. The retailer has also eliminated “Friends & Family” promotions, and reduced the number of items sold at discount, including its store-wide blanket sale events.

The company also said it is prepared for Brexit, following the end of the transition period on Dec. 31. “The impact on the Clothing & Home business is much less than on Food. We have taken steps to mitigate any tariffs on inbound supply by establishing a customs warehouse and on ensuring business continuity in Northern Ireland and the Republic of Ireland by ensuring product labelling meets U.K. and [European Union] requirements,” M&S said.

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Net Sales: Group revenue was down 15.8 percent to 4.09 billion pounds ($5.31 billion). Despite a 15.8 percent decline, the company said that was better than the expected 22.8 percent drop. Food helped to offset lackluster apparel sales.

The company said international revenue fell 25.5 percent in the first half, reflecting the impact of lockdowns in multiple geographies, partially offset by a gain in international online sales of 75.4 percent.

In Clothing & Home, sales were down 61.5 percent in the first quarter and fell 21.3 percent in the second quarter. Online revenue rose 34.3 percent, driven by strong traffic, increased conversion and lower returns. “Online growth was supported by previous investment in capacity at Castle Donington distribution [center,] which performed well during the period, although, this growth was insufficient to offset the decline in store sales. The business is emerging well ahead of the Covid-19 scenario, both in sales and stock position and there are signs that new range structures can drive sales,” M&S said.

Casual apparel did well online, up 40 percent versus a 37 percent decline in in-store sales. Online sales of kids apparel spiked 83 percent, but in-store sales of the category fell 31 percent. Footwear sales were down 20 percent in online sales, and down 55 percent in in-store sales.

“We expect some of the changes in mix to continue into the future as working life and the use of offices changes, but post-Covid, there will also be a recovery in demand for occasion and formalwear as events return,” the company predicted.

Earnings: The after-tax loss was 71.6 million pounds ($92.8 million).

M&S said there were still some uncertainty in near-term outlook connected to both Covid and Brexit, citing the planned lockdown that is slated to start on Thursday. “This will impact [Clothing & Home] profit as store sales are significantly reduced,” although online sales will mitigate the losses, the company noted, adding that inventory levels for the business were also planned down by more than 100 million pounds ($129.7 million) versus the same period a year ago.

“Throughout this uncertain period and as we start to emerge from the crisis, our financial priority is to fund the transformation while focusing on generating cash and strengthening the balance sheet. Our objective is to ensure the business emerges from these uncertainties in a stronger, leaner and more focused position and with balance sheet metrics consistent with investment grade in the medium term,” M&S said.

CEO’s Take: “In a year when it has become impossible to forecast with any degree of accuracy, our performance has been much more robust than at first seemed possible. This reflects the resilience of our business and the incredible efforts of my M&S colleagues who have been quite simply outstanding. But out of adversity comes opportunity and, through our Never the Same Again [program], we have brought forward three years change in one to become a leaner, faster and more digital business. From launching M&S Food online with Ocado to establishing an integrated online business division ‘MS2’ to step-change growth, we are taking the right actions to come through the crisis stronger and set up to win in the new world,” M&S CEO Steve Rowe said.