Is Rose wilting at M&S?

Today is a red letter day for Marks & Spencer's chief executive, Sir Stuart Rose. This morning in the City, he will take to the stage and trumpet the retail giant's biggest pre-tax profits for almost a decade of near £1bn.

But the smooth-talking Sir Stuart, who as usual will be wearing M&S attire, will need to deliver a barnstorming performance and persuade City scribblers that M&S's best days are not behind it. This is because, after being widely heralded as M&S's saviour since taking the helm in May 2004, the past five months have been miserable for Sir Stuart.

In January, he unveiled a disappointing 13-week Christmas trading period with like-for-likes down 2.2 per cent, which precipitated a sharp sell-off in M&S shares and a deluge of criticism.

However, this reaction was a gentle shower compared with the almighty corporate governance storm that met its announcement about Sir Stuart's dual role and succession plan in March.

At that time, Marks & Spencer said that Lord Burns would stand down as chairman on 1 June and that Sir Stuart would serve as executive chairman from that date until his retirement in 2011. The efforts of M&S to appease critics with a letter of explanation in early April still left some scratching their heads. Pali International analyst Nick Bubb says: "It has not yet been explained why you need to be executive chairman in order to groom a successor."

So what strategy should Sir Stuart pursue if he is not to become yesterday's man and go out with a whimper instead of a bang in 2011?

In Sir Stuart's defence, the retail trading environment has darkened considerably over the past five months and many retail executives have described it as the worst since the early 1990s. In particular, there are few, if any, UK fashion retailers singing from the rooftops about their sales figures, as the credit crunch, rising energy and food bills and concerns over a stagnating housing market bite.

However, Credit Suisse analyst Tony Shiret believes there are many reasons why Sir Stuart's current strategy could be guiding the retailer to lower pre-tax profits. He forecasts that the retailer's profits in two years' time could fall £250m below the near-£1bn expected to be unveiled today. Mr Shiret believes he has taken M&S too downmarket. He urged it to suspend its share buy-back programme and called for the retailer to review its aggressive international expansion programme.

On product, Mr Shiret believes M&S has focused on a narrow range of upmarket scale products, which has been supported by heavy advertising, but has done little to enhance its much bigger core product range. He said: "Progress has been limited with standard M&S stuff, such as womens' and men's trousers."

While Bernstein analyst Luca Solca believes that Sir Stuart was right to lower M&S price points, he says M&S stores no longer have the same buzz as they did in the early days under his leadership. "What he did in the near term was quite effective: to increase advertising and lower prices, and M&S became front of mind with consumers, but the impact of this adrenaline shot has started to fade," says Mr Solca.

He urged M&S to introduce new departments, selling products such as fragrances and cosmetics. "This [fragrances and cosmetics] would generate traffic, business and create a buzz."

In fact, Sir Stuart has already introduced new areas into stores, such as a technology department last year, and the retailer has held talks with the French beauty retailer Sephora about opening cosmetics and perfume shop-in-shops in its stores, although it is not clear when, or if, a launch will occur.

While he may well be in tune with the need for new product areas, many feel he has taken his eye off its food business.

Shore Capital analyst John Stevenson said: "In food, they have underperformed our expectations in terms of like-for-like sales in each of the quarters for the past year." In its last trading update, M&S posted a 1.5 per cent decline in UK food like-for-like sales for the 13 weeks to 29 December.

Pali International analyst Nick Bubb points to wider weaknesses with M&S's food strategy and consumers tightening their purse strings. "The food business keeps underperforming because the competition has got better and their stores are too small to expand their ranges."

On the store front, some analyst suspect Sir Stuart may have been too bullish about expansion, both on these shores and abroad. Mr Bubb points to Sir Stuart's confident statements about expansion in November, when the economic storm clouds were gathering. At that time, Sir Stuart said it would have modernised 90 per cent of its store estate by Christmas 2008. "We are ahead of our space growth target and now have a pipeline which will deliver 15 per cent growth in three years and 20 per cent in four."

Beyond the UK, this year alone, the retail giant has unveiled joint ventures to further expand in India with Reliance Retail, and in Greece and Balkan states with Marinopoulos Group.

But Credit Suisse's Mr Shiret is far from convinced that M&S has got the right product offer for its international stores, which tend to be smaller.

Despite a raft of criticisms, most recognise the sterling job that Sir Stuart has done in reviving M&S, which was on its knees in 2004. Mr Shiret says: "I think he has given it a lot of momentum. Ultimately, he has got the profit up a fair way – whether he can sustain that is the test."

As for the storm over corporate governance, Shore Capital's Mr Stevenson says that M&S needs Sir Stuart more than he needs them.

Few in the City believe there is an obvious successor waiting in the wings to fill Sir Stuart's boots. Among the internal candidates – group finance and operations director Ian Dyson, executive director of food Steve Esom, executive director of clothing Kate Bostock and director of international business Carl Leaver – a clear front runner is yet to emerge.

However, Sir Stuart may tone down his barrow-boy charm today and admit that, as the economy has stuttered, M&S's strategy has not hit all the right notes. "I think he needs to stop making excuses and come out and call it and manage the downturn," says Mr Bubb. Sir Stuart has justifiably earned the plaudits over the last four years, but delivering the goods over the next three could be a much bigger challenge.