Britain's M&S says must modernise urgently to survive

By James Davey

LONDON (Reuters) - Britain's Marks & Spencer said it needed to modernise urgently to survive after a second straight annual profit fall and a 321 million pound ($429 million) charge for a major store closure programme.

Shares in the 134-year-old clothing and food retailer rose as much as 6.5 percent on Wednesday after its underlying profit for 2017/18 beat analyst forecasts, it held its dividend payout and investors covered short positions.

However M&S, one of the best known names in British retail, faces unrelenting competition from supermarkets and discounters, fashion chains like Zara, H&M and Primark, as well as Amazon, while pressure on consumer spending is hampering efforts to revive its business.

In November, two months after retail veteran Archie Norman joined as chairman, M&S detailed its latest attempt at a turnaround after over a decade of false dawns - a five-year programme of store closures and relocations to cut excess selling space in its clothing business and moves to make its misfiring food business more competitive.

On Tuesday, M&S said it would close 100 UK stores by 2022, as it strives to make at least a third of clothing and home sales online. At the end of 2017/18 M&S had 1,035 stores in the United Kingdom, with 300 clothing, home and food, 696 food-only and 39 outlet stores.

"If anything the need for change has become more urgent. Accelerated change in the business is therefore our only option," Chief Executive Steve Rowe told reporters.

FTSE 100 RELEGATION?

Prior to Wednesday's update M&S shares, had fallen 26 percent over the previous 12 months, putting the stock in danger of being booted out of the prestigious FTSE 100 index. It is now worth less than both online grocer Ocado and online fashion website ASOS, starkly illustrating how shopping habits have changed in only a decade.

Rowe, an M&S lifer who has been CEO for two years, said M&S was now tackling the structural issues it faces at pace.

"The new organisation, really largely two (clothing and food) businesses, will be in place by July," he said.

"And we're concentrating on tackling the culture of the business, making M&S a faster, lower cost and more commercial digital business."

In addition to the accelerated store overhaul, M&S is improving its website and investing to increase its e-commerce capacity.

Rowe said it was targeting sustainable, profitable growth in three to five years time.

"These changes come with short term costs which are reflected in today's results," he added.

M&S made a pretax profit before one-off items of 580.9 million pounds in the year to March 31, particularly hurt by a decrease in the food gross margin.

That was ahead of analysts' average forecast of 573 million pounds, but down from 613.8 million in 2016-17.

After taking account of special items of 514.1 million pounds, including the charge relating to store closures, pretax profit was 66.8 million pounds, a 62 percent fall.

Turnover was broadly flat at 10.7 billion pounds, though the dividend was held at 18.7 pence.

'PERPETUAL TRANSITION'

M&S lost more ground in its fourth quarter, with like-for-like clothing and home sales down 3.4 percent, worse than the previous quarter's 2.8 percent drop, and same store food sales down 0.6 percent, against a third quarter fall of 0.4 percent.

Prior to Wednesday's update, analysts were on average forecasting an underlying pretax profit of 555 million pounds for 2018-19, which would be a third straight year of decline.

"The business ... is starting to make decisions that have arguably been needed for many years," said Shore Capital analyst Clive Black, who has a "hold" stance on M&S.

"The frustration for long-only investors is that M&S has been in perpetual transition but there remains the need for more patience."

M&S is not the only retailer finding the going tough in Britain. New Look, Mothercare, Carpetright and House of Fraser are all shutting stores.

And Toys R Us, electricals group Maplin as well as drinks wholesaler Conviviality have all collapsed this year.

($1 = 0.7477 pounds)

(Additional reporting by Paul Sandle and Sarah Young, Editing by Alexander Smith and Mark Potter)