Marks Spencer to close 25 Simply Food stores

MARKS SPENCER averted a profit warning yesterday but the UK's biggest clothing retailer acknowledged that deep pre-Christmas discounts had failed to halt a slide in sales.

Sir Stuart Rose, executive chairman, responded with a broad £200 million programme of savings - cutting jobs, closing stores, including one in the Co Down town of Newtownards, and reducing pension contributions in an effort to preserve cash.

UK like-for-like sales fell 7.1 per cent in the 13 weeks to December 27th, with clothing-led general merchandise down 8.9 per cent and food down 5.2 per cent.

Tony Shiret, analyst at Credit Suisse, said the decline in the food division's gross margin was the worst of any grocer in living memory. He said a dividend cut "now looks inevitable".

"It is not a profit warning," Sir Stuart said. Most analysts agreed, although there were a raft of profit downgrades with the consensus forecast for full-year, pre-tax profit scaled down from £625 million to £595 million, compared with last year's £1 billion.

Investors seemed heartened that yesterday's news was not worse, sending the shares up 5¼p to 244p. But credit analysts at Standard Poor's signalled concern, cutting the rating on MS's debt from triple B to triple B-, the lowest investment grade.

Undeterred, Sir Stuart was at pains to show progress in food, as in one breath he confirmed plans to close 25 Simply Food stores while in the next he was bragging that his Christmas trading had knocked the socks of Waitrose - if only for a day.

"Waitrose said they had their biggest trading day of £34 million on December 23rd; well we made £50 million that day, which was nearly 60 per cent more," said Sir Stuart, as he waded through gloomy figures in search for the odd golden nugget.

What was less fantastic were all those days in between. Waitrose like-for-like sales fell 1.7 per cent over the 13 weeks to December 27th, compared with MS's 5.2 per cent decline.

More worrying are the big declines in gross margins. MS has been forced to invest 2.5 to 2.75 percentage points of gross margin, according to analyst estimates, as it cut prices to draw back disaffected shoppers. Waitrose says its gross margin investment is just "a fraction" of MS's.

"We are now in our third quarter of significant gross margin investment at MS and yet like-for-like sales declines remain stubbornly above 5 per cent, which for a food business is worrying," Eithne O'Leary, analyst at Oriel Securities, wrote.

The weak performance was partly due to cash-strapped customers veering away from pricier food. But the rapid expansion of Simply Food - 168 have opened since March 2007 - has brought its own problems.

The explosion of different-sized stores has put a burden on the supply chain. That in turn has left many Simply Food stores suffering availability problems. The chain has also cannibalised sales at the bigger food halls in nearby MS stores.

Ian Dyson, finance director, admitted the speed of expansion in the food division, which should achieve sales of about £4.4 billion in the year to March 2009, had led to complexity. "Our supply chain systems are not as flexible as we would like. We are making a lot of investment in them. In an ideal world we would have done that before we rolled out the chain."

But MS pointed out that its decision to close 25 loss-making Simply Food stores was not a change in strategy, promising it would open another 20 sites in the year to March 2010. Mr Dyson said MS was still aiming for a chain of 600 to 700 sites.

He believed the division, under the leadership of John Dixon, who was promoted to head of food after the sacking of Steven Esom last July, had turned a corner. - (Financial Times service)