M&S warns consumer squeeze will hit profit growth

Retailer Marks and Spencer has warned that the financial squeeze on UK consumers will hit its profit growth this year.

One of Britain’s best-known retailers said that although trading had been encouraging since early April, it expected the financial pressures on customers to deepen over the rest of the year.

“We expect the decline in real incomes to sharpen in the second half and endure for at least the remainder of the financial year,” the retailer said in its full-year results statement on Wednesday.

Chief executive Steve Rowe predicted that consumers would feel the full impact of the income squeeze in the autumn, but said there was evidence M&S customers were better placed owing to higher levels of savings.

The Ocado Retail online grocery venture, of which M&S owns half, is already being affected by a reversion of food shopping habits to pre-pandemic norms, as shoppers return to stores and make fewer large orders.

In a separate statement, the venture said sales growth would be in the “mid-single digits” this year, down from the 10 per cent it had previously indicated, as rising energy costs take their toll.

M&S expected Ocado Retail to make a “minimal” contribution to profits this year. Still, Rowe said the group “remains very confident in the future potential of Ocado” and pointed out that online grocery sales were still materially higher than before the Covid-19 pandemic.

M&S booked a profit of £13.9mn from Ocado Retail last year, itself a steep drop from the £78.4mn during the previous year, when the online grocer benefited from a big shift to online grocery during the pandemic.

The lower than expected profits from Ocado will be compounded by the absence of business rates relief in the UK and M&S’s withdrawal from Russia, which Rowe indicated was permanent.

“We’re not going back in while the current regime is in place,” he said. The group’s decision to pull out will result in about £30mn of one-off costs.

M&S’s share price was volatile in early trading in London, while Ocado’s stock was down about 4 per cent.

Rowe, who steps down later this month after six years, had been making progress in reviving M&S’s fortunes.

A better performance from its revamped food business and improved sales of clothing and homewear helped the retailer to twice upgrade its forecasts during its past financial year.

In the 12 months to April 2, M&S reported pre-tax profit, excluding some items, of £523mn, matching analysts’ forecasts and up from £50mn in the previous financial year. Revenues were £10.8bn, up 7 per cent from last year.

But the chief executive was sanguine about the deteriorating outlook, pointing out that the business was in fundamentally better shape. “Yes there are issues with short-term trading — but when have there not been?” he said.

Rowe is set to hand over the chief executive role to Stuart Machin, currently head of food. Katie Bickerstaffe, the head of clothing and home, will be co-CEO but will report to Machin.

Analysts at Peel Hunt said the slower sales at Ocado Retail were “disappointing”, underlining how the business was being hit by the cost of living crisis facing consumers.


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