Business Analysis: M&S profits dive forces Rose to admit that he 'must try harder'

Stuart Rose tried to soothe investors' fears yesterday that Marks & Spencer's recovery had fallen off course despite a 19 per cent slump in profits.

Stuart Rose tried to soothe investors' fears yesterday that Marks & Spencer's recovery had fallen off course despite a 19 per cent slump in profits.

Almost one year to the day after being parachuted in as chief executive of M&S to defend a potential £9bn takeover bid from Philip Green, Mr Rose was still sanguine about his chances of reviving the retailer.

Dressed head to toe in M&S togs, Mr Rose (who had left his Savile Row clothes in the wardrobe for the occasion) declared the retailer's "value-for-money" message was back on track. His outfit, which included a pair of serviceable black shoes and pink tie and matching socks, cost £124. "I think we can really regain our laurels as a fabulous destination shop. The brand is not dead. The brand is very robust," he said. This was in spite of confirmation that the group had haemorrhaged a further 0.5 percentage points of clothing market share, leaving it with 10.5 per cent.

M&S's shares may be a long way off the hallowed 400p level that Mr Green, the Bhs owner, had indicated he was prepared to pay, but, for now at least, the City is prepared to give Mr Rose and his entourage the benefit of the doubt. M&S shares rose 2 per cent yesterday to 342.25p on relief that the current carnage on the high street had not prompted Mr Rose to rip up the promises he made shareholders in July, starting with an increase in profitability this year.

Standard Life, one of the group's biggest investors, was reassured. "The trading environment is difficult and the management still has some way to go to regain lost sales, but we are confident that the recovery plan remains on track," Teo Lasarte, a fund manager, said. Rupert Trotter, at F&C Asset Management, said: "The management still has the benefit of the doubt today. From here on though they will take exponentially greater responsibility for how the top line performs."

With trading deteriorating even at Next, widely regarded as best in class on the high street and possibly Marks' biggest rival, the omens for M&S's sales picking up are not good. "It's tough and I think it will stay tough for the rest of this year but I don't think it will be recessionary," Mr Rose said. "It's a difficult environment. We have to get our head down and stick at it. But we will use our clout to fight back.... Stabilising market share is not impossible."

There was no comment on current trading, but he did dismiss as "wild" speculation that underlying sales were falling by as much as 10 per cent. And after six consecutive quarters of like-for-like sales declines, at least the group can look forward to easy comparisons as this year progresses.

Mr Rose stuck to his mantra that making headway this year does not hinge on top line growth, but admitted: "If I see no improvement whatsoever through the next three to four quarters we'll have to scratch our heads a bit. I think we've done the right things. Our plan is pretty sensible and robust but it's fair to say I haven't got a plan B." He said a school report on his first year in the job would read: "Worked hard; must try harder."

The plunge in last year's pre-tax profits before exceptional items to £618.5m from £763.2m followed a disastrous Christmas that prompted a swingeing profits warning. Analysts had cut their expectations by about one quarter since Mr Rose took over this time last year. The profit collapse was caused by the massive hit to margins the group took as a result of being "stuffed with stock". With no takers for full-price clothing, M&S had to slash its prices. The 3.1 per cent decline in total clothing sales last year masked a 35.5 per cent fall in reduced clothing sales and wiped 250 basis points off the group's general merchandise gross margin. Although M&S got its suppliers to share some of this pain, UK retail operating profit still fell 15 per cent to £612m.

All of Mr Rose's hopes for an improvement this year hinge on selling more clothes at full prices. He reckons he can save the group £100m this year via a combination of better buying and having less stock. He has slashed the group's stock commitments by £1.3bn - or 35 per cent - which means that even if their fashions still miss the mark, there is less risk of being left with mountains of unsold frumpy jumpers. This means he is confident of hitting this year's cost savings target of £260m.

Although the City's profit consensus for the year to March 2006 hovered around £675m, all of yesterday's margin-boosting talk did little to assuage fears that M&S has yet to re-carve its niche in today's high street.

Tony Shiret, at CSFB, said: "You can always beat up the suppliers to hold short-term profitability but that doesn't equate to achieving something that is a bit more sustainable - which is impossible to see at the moment partly because the product is not right and partly because the market is so terrible."

Mr Rose said the group had gone to great lengths to dispel the widely held perception that its products are poor value. The proportion of sales at "opening price points" - such as women's T-shirts for £6 or a pair of men's socks for £1 - has risen to 17 per cent from 12 per cent last year. "We don't want to start a price war or be a discounter but we do want to position ourselves competitively," he said.

In terms of moving forward, M&S gave the green light to a potential £1bn store refurbishment programme. Rather than spend the money at once, it will revamp 21 outlets this year and open 10 on retail parks for a total capital expenditure outlay of £350m. The group is still trying to get the cost per square foot of modernising stores down from between £70 and £85.

"This is a good clear sign that we've got a formula that can work and if it does the potential is exciting," Mr Rose said. Targeting edge-of-town sites will help the group fill gaps in its portfolio because "retail parks are hot. People want to go there to do a one-stop shop."

M&S is tackling the poor performance of its food estate by closing five city-centre Simply Food sites. It announced yesterday it was taking on the likes of Tesco by entering the competitive world of the petrol forecourt. It has signed a deal with BP to open eight Simply Food sites in some of the petrol giant's biggest forecourts, starting this autumn. If the plan, which follows the opening of 13 Simply Foods at Compass's Moto motorway service stations, works, then about 160 more sites would be suitable candidates for food stores, according to a BP spokeswoman. The BP trial sites are on top of 30 new Simply Food sites elsewhere, including 10 more at motorway service stations.

With the one-year anniversary of Mr Green's interest out of the way, attention will focus on M&S's first-quarter sales update on 13 July. Mr Rose's window to blame Roger Holmes, his predecessor, is getting smaller by the day. By the autumn, when every item on sale in one of M&S's 400-odd stores has been chosen by one of Mr Rose's team, it will have vanished altogether. "If he blows it for Christmas, he'll be out on his ear," one analyst said.