Marks & Spencer's (MAKSY) latest restructuring plan -- which will see it move away from its traditional clothing sales to focus on food -- has raised investor concern that the British retailing icon is headed in the wrong direction.
M&S, as it is known in the U.K., unveiled a five-year, £350 million overhaul that will see the closure of 60 clothing and home stores, the retailer announced in its first-half results released Monday. It will also "reposition" around 25% of its clothing and home space stores and increase the number of its 'Simply Food' branded stores.
The strategy overshadowed a decent, if not spectacularly, third quarter release that had M&S beating street estimates for net profit despite flat revenue growth. Shares in group fell as much as 1.9% to 342.6 pence each in London trading and were the second-biggest decliner on the benchmark FTSE 100.
Year-to-date, M&S stock has lost nearly 25% of its value, but appears to have stabilized somewhat over the past three months, falling only 1.2% against a 4.4% decline for the FTSE 350 General Retailers Index.
"Given our bearish view on U.K. consumer confidence and future clothing spend we hope that M&S' five -year recovery strategy will be a case of 'two steps forward, one step back' but fear it may be 'one step forward, two steps back'," analysts from Jefferies said in a client note.
That said, the logic behind the shift in focus is easy to understand: same-store sales for food in the first half of the year fell 0.9% compared to a 5.9% plunge in clothing and home.
M&S, which currently has 571 of its 'Simply Food' stores and plans to open another 200 over the next two years, has also increased market share by 20 basis points, according to data from grocery store data collector Kantar World Panel for the 12 weeks to October 9, although it still trails industry leaders Tesco (TSCDY) , Sainsbury's (JSAIY) , Asda and Morrisons by a significant margin.
However, the repositioning comes at an interesting time for U.K. grocery stores, which are in a pitched battle to gain market share as intense pressure from low-cost competitors such as Aldi and Lidl puts ever-downward pressure on prices.
"Clothing is a tough game, but food retail is no picnic either, with Aldi and Lidl eating up market share, and Amazon lurking in the wings with its new grocery delivery service," Laith Khalaf, senior analyst at Hargreaves Lansdown, said at a statement. "However, this is a market where M&S has shown it is able to consistently grow sales, and with premium products on the shelves it is more insulated from the discounters than the likes of Asda and Morrisons."
There is also the not-so-small matter of consumer price inflation caused by the 19% fall in the pound since the country voted to leave the European Union on June 23.
In last week's quarterly Inflation Report, the Bank of England predicted that inflation would likely accelerate faster than it had estimated and now sees consumer prices rising at 2.7% pace for each of the next two years, up from previous forecasts of 2.0% and 2.4%.
Liberum analysts seem unconvinced by the move, cautioning that volume improvement can't trump stagnant margins.
"The company looks to be counting on being able to maintain sales densities at a high enough level, even with the inflated store sizes to offset lower food gross margins (clothing and home gross margin was 55% in 2016 vs. 33% in Food last year)," analysts Tom Gadsby and Adam Tomlinson wrote in a client note. "The risk must be that even if the sales numbers look better the profitability will be substantially worse."