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Marks & Spencer to close 32 stores as it warns on cost of living squeeze

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·Finance Reporter, Yahoo Finance UK
·5-min read
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Marks & Spencer A person wearing a face mask makes their way past Marks and Spencer as they walk along Broadmead in Bristol, as face coverings become mandatory in shops and supermarkets in England.
Marks & Spencer warns on outlook as profit jumps. Photo: PA

Marks & Spencer (MKS.L) will close 32 shops as it moves away from multi-floor buildings to more modern edge of town sites with better access and car parking.

M&S said that its sales growth will slow due to the cost of living crunch as it announced it will fully exit the Russian market following its invasion of Ukraine.

The retailer has already closed 68 legacy full-line stores and 19 smaller food stores and is expecting 32 more closures.

"We are now developing a growing pipeline of store relocations, moving from old multi-floor buildings, often with challenged fabric and poor access and car parking, to modern, well-located sites wherever possible in the renewal format with omni-channel capability.

"The full-line store pipeline already has around 15 new stores planned over the next three years, including seven former Debenhams sites, and we expect this to build further. This will help enable a further 32 store closures."

It gave some examples: "The relocation of Thurrock from the back of an underperforming centre with no accessible parking to the former Debenhams site by the bus station with extensive parking is expected to cost a net £8.4m and to pay back in 2 years.

"The announced closure of the legacy four-floor town centre store at Colchester and opening of a new modern store in the retail park on the edge of town will cost a net £7.3m, resulting in an estimated payback of 3.2 years."

The retailer reported pre-tax profits of £392m ($491m) for the year to 2 April – up from a loss of £209m the previous year.

However, M&S said it expected sales growth to slow due to rising costs and increased pressure on customer budgets.

Read more: What is the cost of living and how you can manage yours?

"The business is now much better positioned and had an encouraging start to the year. However, given the increasing cost pressures and consumer uncertainty, we do not currently expect to progress from this lower profit base in 2022-23," it said.

The 138-year-old clothing and food group said its troubled clothing and home business returned to growth during the year, with sales rising 3.8% against levels from two years ago, before the full impact of the pandemic.

This was buoyed by a 55.6% surge in online sales, while stores dipped by 11.2%. Meanwhile, the group’s food arm reported a 10.1% sales increase.

The firm added: “While encouraging, we expect the impact of declining real incomes to sharpen in the second half and endure for at least the remainder of the financial year.”

Richard Hunter, head of markets at Interactive Investor, said: “There is much to like about these numbers from M&S, but there is also much to do before the company can regain its previous status and profit levels.

Watch: UK inflation hits 40-year high

"For all the progress, the share price has been held back by any number of factors and given the outlook comments this could continue to be the case. Quite apart from the effects of declining real incomes as inflation persists, M&S has highlighted some headwinds which will result in a lower profit base for the current year. These include further investment in Ocado retail capacity, the lack of any income from Russia following its withdrawal and the absence of any business rates relief.

"The shares have risen by 55% since pandemic lows, but stepping back from this rebound the picture is less positive. The shares remain down by 46% over the last three years and have fallen by 16% over the last year, which compares to a decline of 11.5% for the wider FTSE250 (^FTMC). Market consensus for the shares remains cautious, with the general view of the shares as a hold leaving the jury out as the company continues its attempts to revitalise its fortunes.”

Household budgets are being squeezed by rising food, energy and fuel bills, with inflation, the rate at which prices price, hitting 9% in April – the highest level for 40 years.

UK inflation jumped to 9% in the 12 months to April, up from 7% in March and the highest level it has reached since 1982.
UK inflation jumped to 9% in the 12 months to April, up from 7% in March and the highest level it has reached since 1982.

Read more: Suez Crisis to COVID pandemic: How economic shocks have shaped history

M&S also revealed it is leaving its Russian franchise business following the invasion of Ukraine.

The retail giant’s Russian arm, which is run by Turkish franchisees, operates 48 shops and 1,200 employees.

In March, the company stopped shipments to the stores but has now said it will “fully exit our Russian franchise” and face a £31m cost hit as a result.

After presenting the results, CEO Steve Rowe will step down as after six years in the top job. He will be succeeded by food boss and joint chief operating officer Stuart Machin.

Mamta Valechha, equity research analyst at Quilter Cheviot, said: “M&S provided a mixed update this morning, and unsurprisingly cautioned on the consumer outlook, which will serve as a reminder the pressures facing UK consumers.

“The group currently sees no progression on profit for FY23, which is already at a lower base than the year that just went, and implies a low to mid-single digit cut to estimates.”

Ross Hindle, analyst at Third Bridge, added: As M&S continues its transformation programme, benefits are expected to continue to flow to shareholders. However, one concern does remain around M&S’s clothing range which once again finds itself in no-mans land between affordable and premium clothing.”

"Management echo's the city's concerns around inflation and its result on the UK consumer's buying behaviour. As such, the next 12 months will prove challenging for all retailers as they battle market share with margin.”

Watch: M&S boss announces departure after 'six successful years'

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